Romania builds hopes for better infrastructure

Romania is due to receive around EUR 4.6 billion for transport infrastructure from EU funds. But while there are several major projects in progress, the country still has one of the lowest levels of investment in infrastructure, making foreign investors cautious about putting their money here, because of the high costs of transportation. BR investigates the hold-up.

Anda Sebesi

Romanian infrastructure has been the subject of significant debate for many years and the progress made towards improving its systemic infrastructure problems continues to be limited. Weak infrastructure is both a huge disincentive when foreign investment decisions are made and a financial burden for all companies that operate in Romania, as transportation continues to be more expensive because of poor road conditions. According to the most recent data from the Romanian Agency for Foreign Investment (ARIS), the level of foreign direct investment dropped from EUR 9.5 billion in 2008 to EUR 3.48 billion in 2009 and again to EUR 2.26 billion in November 2010, with the current economic crisis the main factor. In addition, weak infrastructure has dampened foreign investors’ interest in Romania.

According to a report by the World Economic Forum, cited by Mediafax, Romania is ranked 134 out of 139 countries regarding the quality of its roads. Despite being the ninth largest country in the EU, Romania has only 313 km of motorways, which is less than three percent of the German motorway network.

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Meanwhile, in Hungary, for example, the State Motorway Management Co. Ltd., founded in August 2000 by the merger of three companies, is responsible for the operation and maintenance of roughly three quarters of the country’s highway system. This totals more than 700 km of highway, some 200 km of motorway and roads and a 366 km long road junction branch.

“Comparisons with CEE and EU countries are striking: the density and quality of the roads are a tenth as good. Romania has very few kilometers of highways and investments in absolute terms continue to be very low compared to local needs. It would take tens of years to close the gap at the current pace of development, especially as we are talking about two key components: extension and improvement of the existing infrastructure,” says Bogdan Belciu, partner, advisory services, at PwC Romania.

He adds that while growth in the development of Romanian infrastructure is high compared to other countries, the statistics are distorted by the fact that we are starting from a very low base.

Daniela Nemoianu, executive partner at KPMG, says that many of the infrastructure projects are not exactly nice luxuries. “They are projects that are essential to people’s lives, which government simply cannot afford to put aside, pending a return to happier economic times. The budgetary constraints on public sector funding remain, though, and are becoming worse. This is why we could now see up an upswing in the attempts to pursue infrastructure projects through Public-Private Partnerships (PPP), tapping into private sector funds and resources to deliver public infrastructure amenities,” says Nemoianu.

She adds that tackling the infrastructure investment challenge relies on Romania raising its game. “The people in charge of the EU funds’ purse-strings will need to be persuaded that the government is transparent and compliant about contracting and delivering these projects. Leveraging the limited public money available through accessing private funds will have the maximum input on infrastructure,” says the KPMG representative.

One of the main problems that Romania faces is its degree of absorption of funds for developing its infrastructure. According to the World Economic Forum report, Romania will receive EUR 4.6 billion for transport infrastructure by 2013. Anca Boagiu, minister of transport, said earlier this year that she intended to increase the ratio of absorption of European funds from 4 percent at the beginning of 2011 to 20 percent at the end of this year.

“We have managed to grow the absorption from EUR 32 million to EUR 113 million in the past months. I think we will manage to absorb the majority of funds although it is a tremendous effort. We will increase it to 20 percent by the end of 2011,” stated Boagiu at a seminar organized by Ziarul Financiar in March. She added that in order to reach this ratio, payments from European Commission need to increase from EUR 113 million to EUR 500 million. Boagiu intends to make payments of EUR 2.7 billion for projects by the end of 2012, rising to EUR 3.6 billion by 2013. she has said.

Big projects in Bucharest, but few

Bucharest’s Basarab Bridge was officially opened in mid-June. The most important infrastructure project of the last 20 years links Nicolae Titulescu Boulevard, Orhideelor Highroad, Grozavesti Bridge, Vasile Milea Boulevard (for tramways) and Grozavesti Highroad. The EUR 160 million plus deal was signed back in 2006 and had an execution period of 45 months.The Bucharest subway is also set to expand, with Metrorex announcing that it intends to extend Line Four to include two more stations, Laminorului and Straulesti. The estimated value of the contract is RON 375 million without VAT, with the deadline for completing the work being two years.

Last month the Ministry of Transport launched a public debate about the prospective extension of Line Four to the area of Straulesti Lake, where a terminal with parking space, a dispatcher and a car station will be built. The investment for this project is estimated at EUR 298.5 million with VAT included, financed by a loan from the European Bank for Investments, the state budget and Metrorex. At moment, Line Four has just four stations – Gara de Nord 2, Basarab 2, Grivita and 1 Mai – while two more – Pajura and Parc Bazilescu – will become operational in July. Metrorex has also signed a contract for the Raul Doamnei-Eroilor transom of Line Five with a consortium led by the Italian company Astaldi and delivery in 2014. The contract is worth EUR 215 million without VAT, out of which 50 percent will be funded by the European Bank for Investments and the remaining 50 percent by the Romanian state budget.

Another project that could be delivered this year in Bucharest is the over-expansion of Pipera Highroad and the passage over Barbu Vacarescu Boulevard. The work started last year and has 2012 as the deadline, with the contract worth EUR 25.3 million, including VAT.

But there has also been bad news for Bucharest: the minister of tourism and regional development, Elena Udrea, recently announced that she had asked the State Inspectorate of Construction (ISC) to halt the building of the Buzesti-Berzei segment of the future Buzesti-Berzei-Uranus Boulevard. The project has been contested since the beginning by many NGOs that have criticized the decision to destroy some historical monuments in its way. In November last year, Sorin Oprescu, the mayor of Bucharest, described the Buzesti-Berzei-Uranus project as “the largest urban operation in the last 20 years”. Local authorities estimated the value of the investment at about EUR 330 million at that time.

Motorways still stalling

Although Romania has few kilometers of motorways, the future seems to be brighter, at least according to the minister of transport. She says that Romania will have 845 km of motorways in the coming years as the result of a EUR 5.17 billion investment.

”There are 313 completed km of motorways and another 276 underway,” said Boagiu at the end of May. She also signed the first five contracts for 98 km of Corridor IV with a total value of EUR 692.68 million and a deadline of 2013. Asked if the average price per km for the five contracts – about EUR 7 million – was bad value, Boagiu said that this didn’t reflect passages and bridges, operations that are included in these contracts.

Further good news is that the Basarab-Constanta transom of the Soarelui (Sun) Highway and the Constanta ringroad on a single lane will be finished in July. The Basarab-Constanta section is part of the Medgidia-Constanta route where Astaldi and Max Boegl are working with a contract worth EUR 211 million. The money came from the European Bank for Investments and the state budget.

Meanwhile work on the Deva-Orastie highway transom, part of the Trans European Corridor IV Nadlac-Constanta, began in April this year. The 32.5 km road will be split into two segments: Simeria-Orastie (which will be completed in August 2012) and Deva-Simeria (to be finished in February 2013). The value of the contract is about EUR 178 million, without VAT, out of which EUR 109 million came from the European Commission and the rest from the Romanian government.

Despite the new launches that have taken place this year, the Transylvania motorway is still posing big problems for the Romanian authorities. They have to negotiate a new deadline with American company Bechtel, which will overrun the established one in 2012. The project to construct the Transylvania motorway’s Brasov-Bors transom started back in 2004 based on a EUR 2.2 billion contract signed with Bechtel. But work stopped in the middle of 2005. The Transylvania motorway will be 415 km long, with the total segment built by now with the financial support of the state hardly exceeding 10 percent of the total route.

Cost efficiency in question

On the topic of cost efficiency, Belciu says that not only does Romania need to use all available sources of funding, but it also needs to do it in the most cost effective manner, avoiding waste, excess or unjustified costs. According to Stefan Ponea, managing partner at Industrial Access, any building contractor includes in its quote extremely high margins in order to be able to cover for any unpredictable costs.

“This generates a very inflated cost structure for each stage of the project,” he says. Referring to Romanian building contractors, he adds that Romania has a low enough cost of labor and they prefer to work that way rather than adopting new working methods. “Another important issue in managing production costs is that Romanian building contractors prefer to buy equipment even if they haven’t been working at 60 percent of capacity for five years consequently. This is reflected in fixed costs, amortization, storage costs, security services, maintenance, rental costs, etc,” says Ponea.

He adds that in countries with more developed infrastructure such as Great Britain, Germany and France, many building contractors lease their equipment rather than buy it. Last but not least, the efficient planning of a project could cut the final cost by 30 percent, from labor force costs to transportation.

At a crossroads

Romania risks falling behind in the global race to develop efficient and sustainable economic infrastructure and the nation’s future economic growth depends on the success of a rapid and coordinated national revitalization of Romanian infrastructure, say commentators.”The crisis and growing global infrastructure demand mean Romania now faces even greater competition for the finance and resources we need to complete our most pressing projects.  Unless we can fund these infrastructure projects, we face the prospect of an increasingly stagnant economy and attendant increases in the level of unemployment,” warns Nemoianu of KPMG.

Belciu of PwC adds that Romania has some key issues that need to be resolved for the country to adapt to the current economic context. “First, it is about creating of a clear strategy for infrastructure development. With huge needs and limited funding available, investments need to be prioritized carefully in order to direct the funds to the areas that need most support,” says Belciu. He adds that the usage of EU funds for infrastructure, a sector where their absorption has been very low, must be maximized.

“It is also important to identify complementary funding as EU funds will not be sufficient to address the development needs, which is a difficult task given the ongoing budgetary constraints. In this context, the leverage of PPPs, concessions or similar methods could provide in certain instances an important source of alternative funding.

These methods are widely used in many EU countries, including France, Italy, Portugal, Spain, Great Britain, Ireland, and to a relatively large extent in other CEE countries like Hungary,” says

Belciu.

Ponea of Industrial Access suggests that a potential solution for optimizing Romanian infrastructure would be to take the same path that other Eastern and Western European countries have followed.

“When the state or local authorities haven’t been able to manage some infrastructure projects efficiently and quickly – because of a lack of money – the only sustainable solution was to lease to private companies, specifying clear execution terms and penalties if the deadline, terms and required quality of work were not met,” says Ponea.

“The lack of a realistic long-term national strategy (at least ten years) is the reason for the current blockage.”

In his opinion the real liberalization of the market by eliminating the political factor in allocating infrastructure projects could be the right approach for managing efficiently all the players that have infrastructure projects in Romania. “There is no lack of funds, bidders or demand for roads. There is a lack of vision,” says Ponea.

En route: projects due to start this year

• Rehabilitation of the Campina-Predeal railway line. The project startedback in 2007 and is worth EUR 312 million
•  Timisoara-Arad motorway. Final delivery will be next spring. The project started in 2009 and is estimated to cost RON 483 million, without VAT
• Moara Vlasiei-Ploiesti segment. The 42.5 km project is estimated at EUR 238 million

The five contracts for the Corridor IV motorways

Job: First segment, 10 km of Timisoara-Lugoj sector of motorway

Consortium / company: Romanian-Italian association Spedition UMB-Tehnostrade-Carena SpA Impresa di Costruzioni

Contract value: EUR 63.62 million

Job: First segment and the link road of the transom of Nadlac-Arad motorway

Consortium / company: Romanian-Portuguese association Romstrade-Monteadriano Engenharia e Construcao-Donep Construct

Contract value: EUR 115.8 million

Job: The second segment and the link road of the transom of Nadlac-Arad motorway

Consortium / company: Alpine Bau

Contract value: EUR 124.45 million

Job: First segment of Lugoj-Deva motorway

Consortium / company: Tirrena Scavi-Societa Italiana per Condotte d’Acqua-Cossi Construzioni

Contract value: EUR 205.9 million

Job: The third segment of Orastie-Sibiu motorway

Consortium / company: Impregilo

Contract value: EUR 182.91 million

Source: Mediafax