Infrastructure network development is the foundation for local economy growth

Newsroom 13/11/2015 | 14:33

With one of the poorest infrastructures in Central and Eastern Europe, Romania needs to strategically invest significantly in this field in order to better social living standards, increase business opportunities and achieve parity with its EU neighbours.

 

Anda Sebesi

At present, the  infrastructure quality in Romania is relatively inadequate, with several factors contributing to this. Despite recent reforms, Romania still lacks a robust framework for developing, vetting, prioritizing, and executing public investment projects. A coherent and predictable strategic plan is lacking to guide the project selection process and preserve priorities over the medium term. Local authorities continue to announce and begin new infrastructure projects, but provide little incentive to see the projects through to completion. In addition, the transportation network is dominated by large, inefficient, and financially-vulnerable state-owned enterprises.

The local infrastructure is substandard due to a backlog of incomplete projects, as well as administrative deficiencies in the maintenance and operation of the infrastructure.

According to the most recent IMF country report, released in March, increased

quality public investment in infrastructure can boost growth in Romania. In addition, greater absorption of available EU grant funding could play a significant role in

increasing the quality and quantity of infrastructure spending in a tight budget environment. Furthermore, acceleration of project management reforms and stricter implementation of medium-term budgets are needed to realize the full growth benefits of infrastructure investment, the same report states.

Infrastructure density, particularly as concerns the road network, is relatively low. The low density itself may be attributable to broader issues. A 2012 World Bank study, quoted by the same IMF country report, notes that “there is a serious problem of leadership, management, and governance in the transport sector, including in roads.” A separate World Bank report, using a specialized dataset of road-sector contracts under Bank-funded projects in 14 countries in East Europe and Central Asia, found that Romania had the second highest average number of red flags per contract.

The same country report says that the legacy of poor project planning, in addition to political expediency, is a large and unwieldy central government project pipeline clogged with old projects. At end-2013, the central government’s project database included 543 projects with an investment value equivalent to 31 percent of GDP. Based on World Bank analysis, only 85 of the projects received non-reimbursable funding from the European Union, while the remaining 97 projects received no funding at all in 2013. In addition, cost overruns amount to 2 percent of GDP with many projects having long implementation periods. Currently, there are 78 projects expected to take more than 10 years to complete, including one with a duration of 42 years. Moreover, the budget does not provide funding for all projects with a duration of less than a year. Funding for some of these projects will inevitably have to be postponed for future years. More broadly, pundits say that given the long duration of the portfolio, it is quite possible that many projects are no longer consistent with current objectives.

Elsewhere, Romania’s infrastructure spending will grow on average by 5 percent per year between 2013 and 2025—faster than growth in Western Europe, but slower than the global average —with the infrastructure market reaching around USD 30 billion by 2025, according to PwC’s and Oxford Economics report Capital Project and Infrastructure Spending: Outlook to 2025.

“Romania’s infrastructure, especially transport infrastructure, is still in much need of improvement, which explains the substantial increase in expenditure on roads in recent years. We expect road spending to continue as a priority during the European economic recovery. Aided in part by EU funding, investment in roads is forecasted to continue to take the lion’s share of transportation investment, rising from USD 4.5 billion in 2013 to just shy of USD 9 billion by 2025”, stated Daniel Anghel, tax partner, leader of the service team for the public sector at PwC Romania.

Romania’s heavy industrial sector looks well-placed to compete against higher-cost neighbours. In fact, investment in these sectors boomed in the years leading up to the country’s accession into the EU, before pausing during the Eurozone crisis. Looking ahead, PwC expects investment to rebound in the chemicals, metals and fuels sectors, almost doubling from USD 2.3 billion in 2013 to USD 4.5 billion by 2025.

The same study shows that social spending will likely also be a priority. Healthcare spending will grow by around 0.5 percent a year faster than education spending, as Romania’s population ages (albeit at a slower rate than in Western European countries.) Total social infrastructure spending is expected to reach USD 10 billion a year by 2025.

“In order to consolidate and accelerate its economic growth, Romania will require massive investments in infrastructure in the coming decade, in the order of tens of billions of Euros. In order to finance such large investments, public authorities should take into account a wide range of financing structures – from European funds to public-private partnerships”, says Anghel. “We should try to emulate the Spanish model that puts concessions to maximum use for infrastructure development. We also need multiannual budgets capable of providing long-term funding for ongoing infrastructure projects”, concludes Anghel of PwC Romania.

The PwC research analyzes capital projects and infrastructure spending across 49 of the world’s largest economies across six continents. The definition of infrastructure is wide-ranging, taking in a number of broad sectorial groupings and economic activities. The reports covers the sectors traditionally classified as infrastructure, such as transportation and utilities, but also looks at a number of the key manufacturing and activities that enable transportation and utilities sectors to develop and operate. The report also looks at sectors that supply households with essential human services such as education and health, or social infrastructure.

Elsewhere, earlier this year the European Commission adopted the Operational Program for Large Infrastructure of Romania (POIM) for 2014-2020, worth EUR 9.5 billion. The sum will be used for investments in environment, energy and transportation projects. The program represents about half of the EUR 23 billion allotted to Romania through the EU cohesion policy. “This investment package is the largest operational program for Romania and the second largest from Europe in terms of size; it will contribute to the development of a sustainable and ecological transportation system, will protect the environment and increase the energetic efficiency. In addition, better railway and road connections will create new business opportunities and will reduce the transportation costs,” stated earlier this year Corina Cretu, the European commissioner for regional policy, quoted by Agerpres.

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