Development needs still suffer setbacks
Romania has massive needs and huge amounts of cash to solve them. But there is a lack of will to put them both together: findings from a symposium on financing infrastructure
Romania’s infrastructure needs are massive, but the variety of mechanisms to fund these projects has never been as numerous as today.
Greater dialogue and understanding is therefore necessary between central and local authorities and private stakeholders in public projects.
To outline the problems and the possibilities in local Government financing, senior decision makers in the process, such as mayors, state secretaries, bankers, constructors and consultants gathered to discuss how local authorities can best access funding for their projects.
The Symposium was organised on 26 April 2007 by The Diplomat - Bucharest in combination with attorneys-at-law Wolf Theiss, partners Siemens and Unicredit Leasing and supporting partners VMB Prteners, Dexia Kommunalkredit, BT Securities, Lena Romania, Sedesa and Search Corporation.
The findings of the symposium raised the following issues:
● The cash to finance infrastructure is easy to find from a variety of sources. The major problem is the slowness of the implementation of projects that are financed.
● Romania will face increased urbanisation and need to create new forms of infrastructure that anticipate a developing city and suburban population.
● There is a need for continuity at the level of local and national Government regarding projects that could take up to 30 years from financing, execution to pay-back periods. There must be as little political influence on administration of infrastructure projects and private-public partnerships (PPPs) as possible.
● There must be a consensus across all political parties that such projects need to enter into action. Stakeholders in infrastructure development need assurances from the executive that long term strategic planning will not be upset by a change in Government, which has happened in the past.
● If a public authority is putting out to tender a concession to a private entity to undertake an infrastructure project, it needs to take into account the long-term costs of maintaining the result of that project, such as the upkeep of a motorway.
● There needs to be a greater understanding from local authorities about the cost-versus-quality dilemma. Public projects put out to private tender need to understand that the cheapest option sometimes cannot deliver the desired result and often ends up being more expensive in the long-term.
● Gatekeepers in the accounts department need to have detailed information allowing them to make informed assessments on cost-versus-quality, not just a price list.
Identifying infrastructure needs and
correct forms of finance
Adrian Baicusi, general manager of Siemens Romania:
“2007 is the first time ever when the world’s urban population overtook that of rural areas. Moreover, by 2030, more than 60 per cent of the world’s population will live in cities. Everyone will now focus on urban development. In all big cities, a bigger problem is public transport. Unfortunately, solutions are found to tackle the upgrading of existing systems rather than building new ones, and this is just a temporary solution. It is important to find a solution to the transport problem, because of increased pollution and traffic. There is also a problem of safety in cities. Street crime has long-term effects, and targeting this will have an effect on civil and individual rights. Water and power supply are serious issues for cities. There is a weak distribution network in some cities, and modernisations have been delayed for too long.”
Marius Bostan, senior partner at VMB Partners:
“We have the financing and the co-financing means, such as public finance, bank credits or EU funds. Compared to 2003, this is a new market, in continuous development in the field of large projects like infrastructure. To satisfy infrastructure’s needs, it is important that the best financing means is found as well as the best technical solution.”
Roxana Lazar, CEO of Dexia Kommunalkredit Romania
“Since 2005 we have noticed immense opportunities in public finance. Mayors and presidents of county councils have a multi-project approach, and they need courage to approach big loans for projects in infrastructure, water and waste management. Another positive factor is that Romania is showing a level of transparency close to that of EU member states.”
Goetz von Thadden, head of office – Romania, European Investment Bank
“There are three main sources of financing infrastructure in Romania. Firstly there are bonds, which is a general means that can be used flexibly. It is also cheap, with a fairly short maturity, hence the significant risk of re-financing. Using this should be decided on a case by case basis. But bond investors get nervous, and if something goes wrong they throw the papers back at you.
The second is banks, which are more expensive, but they know their market.
The third is International Financial Institutions (IFIs), which can give attractive and large loans up to 500 million Euro. For example, we gave a loan to Bucharest last year with a 20-year maturity.
IFIs look at projects and evaluate them. We only give out direct lending for projects over 12 million Euro. But there is room here for all three sources and they should be used together.”
Gabriela Caluseru, general director, Eastern Europe Rating Agency
“Studies by the European Commission show that Romania will receive 22.9 billion Euro [in EU structural funds] to reach EU standards. About 70 per cent of this is for municipalities. The legislation exists to allow local public authorities to structure an association [between one or more municipalities to access a greater slice of the structural fund cake]. This has started to develop. There are EU programmes and EBRD funds which give a boost to these associations, and there is direct financing if regional companies are created (such as between the countries of Cluj and Salaj). This has not been created by a strategy, but by a context, and it functions very well.”
Tudor Popescu, director corporate finance BT Securities:
“Municipalities are more open to bond issues, as opposed to taking out bank credits. But at the same time there is lot of work to be done in Romania and it’s a pity we haven’t accessed EU funds so far. There are financial advantages to maturities and interest rates in the case of a bond issue and a revolving credit. Municipalities have a better option this way, because it is cheaper and long term. It can last up to 20 to 25 years. This will also be a good placement option when private pension funds appear in Romania [due in the next 12 months], because the interest rate of a bond issue sits between that of a bank deposit and a bank loan.”
Andrei Iliescu, relationship manager, public leasing at UniCredit Leasing:
“Leasing can be an alternative funding mechanism, not necessarily for complex projects, but for case by case projects. Leasing is flexible with regards to guarantees. The ownership title comes under the responsibility of the leasing company and then those who contract the deals are exonerated from putting up risk guarantees. There is now a trend to assist local public authorities for small financings based on a project by project basis and such authorities can be assisted [by leasing] if they need and request it.”
Michael Stanciu, president, of Search Corporation
“There is a lack of long-term vision from municipalities and local and national public authorities. They need thorough planning and a masterplan to create coherence in developing infrastructure. Planning should be done based on thorough preparation of the project, and this, in its turn, has to allow the planner to think it through, according to its magnitude and delivery time. Money is spent on short-term programmes and inadequate preparation, which in the end turns out to be time and cost-consuming.”
Petre Traistaru, Mayor of Calafat
“What is beneficial, especially for smaller municipalities, is the supervision of those who execute the job. This way we could cut future losses. As an example, we had a 5.2 million Euro project that had to be completed in 18 months, but it took more than two years because we did not have the authority to supervise the works. If the local council would have the power to supervise, works would be implemented in time.”
Doina Lupascu, consultant, Ministry of Development and Public Works
“In the new Structural Operational Programme (POS) on regional development there is a regulation that says local public authorities will have full responsibility in programming, planning, implementing and acquiring of public works and signing contracts. Thus they will get the authority you need.”
Can authorities afford the costs?
“From our analyses, local public authorities in Romania are not that much in debt. Very few municipalities are close to the 20 per cent limit, and even in their case, this is owing to guarantees needed for EBRD credits for water or transport projects.”
“In the third quarter of last year the Ministry of Transport had not managed to spend even 30 per cent of its approved budget. A coherent strategy is needed because money exists.”
Strategies for projects
Bryan Jardine, managing partner at Wolf Theiss & Associates
“Once you got the money to finance your project, you have to take care implementing it. The devil is in the detail. Implementation is confronted with structural issues, legal concerns and changes in the Private Public Partnership (PPP) legislation. This all creates uncertainty. So does PPP really exist here or is it an illusion?”
Ciprian Gorita, head of PPP unit, Ministry of Economy and Finance
“There are seven PPPs in the making now, including one on solid waste management. It is important for local authorities to access EU funds, but it is less likely they will cover all local needs. PPPs can be an alternative to these needs. There is a POS (Structural Operational Programme) under negotiation now.”
Roxana Moldovan, executive vice president, ABN Amro
“Regarding the POS, in the project finance strategy it mentions as sources the state budget, EU funds and IFIs. Commercial banks don’t appear here as possible lenders. Why leave banks outside? For example, in the draft law to merge Henri Coanda and Baneasa airports, at first, financing sources included the state budget, private funds and commercial banks. Two weeks later the law changed, eliminating all financing sources except from the state budget.
Sorin Bolchis, consultant, PPP unit, Authority for Infrastructure Management
“In legislation, [on concessions - where private companies take over responsibility for a public activity, such as picking up toll revenues on a motorway, usually it has some overlaps with PPPs] what the former Minister of Transport Radu Berceanu has said will remain in place. Now we have to see what type of concessions we can put in practice. We are working on a pilot project and hope to get all the data and documents we need to speed up its implementation. We have been working on PPPs since 2002. After three years we have the experience and we can approach projects, and approach financial consultants to help us.”
Are PPPs necessary?
“When the central budget finances infrastructure projects, there is a tendency to minimise the initial investment and maximise the cost of maintenance and operations. In highways, for example, Romania has a primary network of about 3,000 km. Last year it built 98 km. At this pace, it will take about 30 years to build a primary network. If Romania were to build between 250 and 300 km per year, it should look to money it doesn’t have. And then, investors will look at the return on investment, not the initial costs. Playing a role in designing, construction, financing, operating and maintaining a project can give the Government accessibility and modern modes of transport. Romania does not need 30 years to do that. There should be no question that we need private investors or a way to connect private and public partners. This connection has to be in place and we have to create the knowledge and security that we, as investors, need in the long term.”
“We need both PPPs and EU money, because the way we, at the central unit, approach PPPs is comprehensive. We need a strategy for the sector. Two PPPs are still at work. There are five more ‘pure’ PPPs in the making, in public transportation and heating, in Craiova, Videle, Oradea and Slatina. We need a mix of will and political support.”
Peter Snelson, project development
“When the Channel Tunnel was built there were four Ministers of Transports negotiating, but one civil service throughout the whole process.
“In UK and France’s case, everything changed, but the policy. Here the policy changes with the minister. Unless you get the contract signed before elections, you risk not having it signed.”
Manuel Pires Joao, administration counsellor, Lena Constructii
“In Portugal, we managed to grow using EU money. If Romania knows how to take advantage of EU funds, it’ll take ten years, not 20 as in Portugal, because here you have the conditions to grow and succeed. You have everything and everything to do.
“In Romania it is necessary for politicians to understand each other.
“One example is that you discuss a project with three or four different ministers of public works, and this can’t continue.”
Price versus quality
Daniela Oprea, counsellor for EU Integration, Sighisoara City Hall
“You have to know what to ask for and how to chose to be able to chose price over/or quality. We need to pay more attention to consultants.
“EU funds are a tough responsibility, both on the financing and the co-financing part. City Halls needed more knowledge.”
Sandu-Victor Capalnasiu, Zalau Mayor
“We miss specialists [working in local Government]. We do not have enough money to retain them [and they move to the private sector]. You come in contact with specialised firms when you have a wider range of issues to tackle: there is a great need for partnership on specific sectors with specialised firms.
Ani Merla, counsellor for EU
Integration, Constanta City Hall
“We want to learn from mistakes done in the EU and see what are the advantages and the disadvantages.”
Nicolae Oana, president and general manager of Sedesa
“On project preparation, if this is well structured, one can solve the problems of execution and finalisation. I think one of the main problems is that of consultancy, which all local public authorities (small and medium municipalities as well) should ask and receive. Prioritising and selecting projects is vital. There are projects [put out to tender] that are not up to date from a technical point of view, because local authorities want to access funds and put out an auction. Then there are firms that take part in the auction who make efforts to comply to the conditions, but that project has not been assessed successfully. What happens next? In Romania’s case the local authority cancels the tender, but the needs remain. If the project had been well-prepared, time and money would have been saved.”
“If a project is selected and the consultants in charge with the feasibility studies think about everything in terms of money, then time and money is lost and the profitability of the project is zero. The selection process has to be rethought in this case, and the focus should be on what the contracting authority wants. The cost should be discussed after the technical solution is selected. Once this is accepted, then there is place for a talk about money. It’s either minimum costs or a selection based on the technical-economic solution proposed. Projects of national importance are treated in a weak way because of the incapacity [of the national interest] to see things in this way. Companies should be selected based on capability, not on cost. If a project is drafted in a good way and money is wisely spent, time will make sure running it will need less money.”
Narcis Neaga, director in CNADNR
“Since 2002 I have learned how important it is to read and understand the package put out by the public authorities. Each time the local public authority wanted to pay more, the Court of Accounts says it should pay less.”