Quality infrastructure is critical for economic growth, and in Romania much still needs to be done to upgrade the country’s infrastructure to European standards. Governments have acknowledged the important role that infrastructure plays, stating it to be a top priority. However, the pace of progress has been extremely slow, as improving infrastructure requires large amounts of resources. The state budget has limited funds allocated to infrastructure projects, absorption of EU funds for this purpose has been low and efforts to use alternative financing mechanism such as PPPs have not yet achieved results.
In the period since the last issue of our White Book, improvements have taken place, although fewer than we would have hoped for. An intensive dialogue with the European Commission on the strategic priorities for transport infrastructure, finalisation of the Public Private Partnership (PPP) Law, restructuring of the CNADR and the phasing-in of major infrastructure projects not finalised in the previous programming exercise 2007 -2013 are some of the most notable positive developments.
Efforts are being made to create a better administrative and legal framework for the development of infrastructure projects, such as the re-organization of the national road authority, the new Public Private Partnership (PPP) law, as well as the setting up of a development bank and a sovereign fund. However, the FIC believes that the following issues should now be prioritised.
In order for the Master Plan to be an effective roadmap for infrastructure development several measures should be considered in terms of operational roll out:
Based on regional, national and European needs and objectives, clear infrastructure policy objectives need to be agreed at country level, for each type of infrastructure (transport, water, waste, energy, etc.). These should be the starting point for the prioritisation and coordination of large infrastructure projects over the short, medium and long term, coupled with the identification and securing of the best funding sources/funding mix for each project (EU funds, private/commercial funds, public funds).
The above should take the form of a short and clear National Action Plan for Infrastructure. Some key infrastructure projects have already been prioritised for financing under the Large Infrastructure Operational Programme (LIOP) 2014-2020. However, even these have suffered long delays.
Once prioritisation and funding mechanisms have been clarified, this plan should be formally approved (possibly adopted as a law by Parliament).
In spite of significant investments made over the past few years with public funds, EU grants and other funds, Romania still needs to make huge investments in regional/municipal infrastructure to comply with EU standards and regulations. For example, the water sector is estimated to need EUR 10 bill. to comply with the relevant EU regulations, but only about EUR 2.8 bill. are available from the EU under the 2014-2020 funding exercise. Apart from financing, timing of investments is also key - as the deadlines for compliance are very close, while projects eligible under LIOP 2014-2020 or the Regional Operational Programme (ROP) 2014-2020 have suffered long delays.
As EU grants are clearly not enough to cover all needs, more innovative solutions are needed, to provide the necessary financing, as well as to increase efficiency of municipal services. Consequently, private sector participation could be the right solution – starting with outsourcing municipal services, and then, at a later stage, introducing private co-financing or private management.
This recommendation, aimed at increasing the impact of infrastructure projects, as well as maximising participation of the private sector– especially at municipal level –aims to maximise the use of financial instruments in funding urban development projects (for example, energy efficiency projects). These have the potential to reduce the pressure on municipal budgets, increase efficiency, as well as to attract private sector finance and expertise to public administration. Furthermore, these schemes could take advantage of available EU grants and improve absorption.
The use of financial instruments would orientate local and county public administration more to revenue generating projects and, by so doing, increase the economic growth in communities. In contrast to the traditional grant approach, the use of financial instruments would stimulate local public administration to identify those types of infrastructure projects able to generate enough income to repay the financing resources and would provide Romania with long-term financing mechanisms for infrastructure projects.
As well as developing a clear road map and prioritisation, financing these infrastructure projects is also one of the challenges that the Government is currently trying to address through basic budgetary financing, as well as aiming to achieve better absorption of EU funds, using PPPs, setting up an investment bank and creating a sovereign fund. We believe that the Government should concentrate on the following:
In the past few years, the main progress in the absorption of EU funds has been the level of amounts approved for payment to Romania by the European Commission – which has reached close to 83%. Unfortunately, the progress in absorption of the funds allocated for 2014 – 2020 has so far been fairly insignificant, below 1% of the allocation for Romania for this period. Of even more concern is that Romania is running the risk of not being able to access significant amounts, mainly for infrastructure projects, for failing to meet certain criteria.
The new programming period came with increased requirements for beneficiary countries at both strategic and operational (implementation of operational programmes) levels. We appreciate the significant efforts made by the Romanian Government to close the numerous ex-ante conditionalities, but a number of conditionalties are still under negotiation with the European Commission. The most important programmes cover infrastructure, such as waste management, water management, and transport.
Source: EU Funds in Central and Eastern Europe, KPMG Romania
Delays in the absorption process are generated by the delay in the designation process – i.e. the accreditation of the Managing Authorities of the Operational Programmes financed from structural instruments. Urgent measures must be taken by all relevant parties to ensure full compliance with the key requirements of the EU regulations and complete the designation process as soon as possible.
Furthermore, in order to secure smoother implementation of the operational programmes and to prevent future suspensions, to avoid significant financial corrections and the cancellation of a significant number of projects, the managing authorities should apply lessons learnt from the past programming exercise. The procedures need to be made more efficient, and, where feasible, cost simplification should be adopted and more active beneficiary support should be secured.
The FIC considers that there should be urgent clarification of the mechanisms for implementation of financial instruments. This is especially important for those sectors where no previous experience exists (financial instruments for municipal projects, human capital interventions etc). We believe that – as the experience with financial instruments for SMEs revealed – the application of this sort of approach can secure a higher leverage effect, which, together with the revolving effect, could mean that allocated funds would have a significantly higher impact.
Implementation of infrastructure projects could be improved by the setting up of a Development Bank to finance state institutions, city halls, local administrations as well as SMEs and other local entities which promote infrastructure development. This would encourage exports and increase absorption of EU funds. Moreover, best practices from other countries which have already followed the same approach – e.g. Poland, Croatia, Hungary and Germany- could be implemented.
The government has already announced that a new Development Bank will be developed –based on a transformation of the current Eximbank. The FIC welcomes this, and looks forward to the setting up of the new bank. The Romanian Development bank will “contribute to the implementation of the Government’s economic strategy, by using specialised banking products for eligible beneficiaries”. The operational framework for this institution should be set up as a priority to ensure that it can begin work soon to support the building of better infrastructure.
The FIC also recommends maximising the use of financial instruments in funding urban development projects, as a means to increase the impact of infrastructure projects, as well as maximising participation of the private sector– especially at municipal level. Besides the leverage effect that this approach would have (by adding private to public resources), this would orientate local and county public administrations more to revenue generating projects and, by so doing, increase economic growth in communities. In contrast to the traditional grant approach, the use of financial instruments would stimulate local public administrations to identify those types of infrastructure projects able to generate enough income to repay the financing resources and would provide Romania with long-term financing mechanisms for infrastructure projects.
The Government has already begun to develop this type of initiative, and is planning to set up the Sovereign Development and Investment Fund, following the approach already successfully implemented by other European countries (e.g. Norway, France, Italy, Poland).
The fund’s purpose would be to develop and support the main sectors of the Romanian economy – investments in infrastructure (road and rail), agriculture, industry, and healthcare. The fund may also be used in conjunction with PPPs. One of the key areas to be addressed among many others when setting up such a fund, is the underlying provision of funding. We believe that the fund should own a set of clearly identified assets with economic value rather than having too large a base. This would enable the fund to have greater impact.
Most infrastructure projects are by their nature very complex. Moreover, large infrastructure projects often require tailor-made, innovative solutions, which can be provided by highly experienced and knowledgeable experts. Considering the need, the existing resources at the Government’s disposal at times may not be sufficient to carry out multiple projects simultaneously.
FIC members would strongly welcome greater involvement in infrastructure projects by the private sector, because many aspects can be outsourced. The private sector has considerable expertise which the Government can use to facilitate the development of more infrastructure projects at a faster rate.
Public Private Partnerships (PPPs) have been discussed and evaluated for some years as an alternative financing mechanism for Romania’s infrastructure needs. They have become even more relevant at present, given their potential role as a financing tool in the 2014-2020 EU funding programme. As a result of EU concerns, Law 178/2010 was repealed last year and in November 2016, a new PPP Law 233/2016 was approved. The FIC welcomes the resulting improvements both from a legal and an operational perspective. There are now possibilities for PPPs in the public utilities and public utility community services sectors, as governed by law 99/2016 and law 51/2006 respectively.
We still await the secondary legislation, which should be published soon. However, attention should be paid to ensuring a logical framework of PPPs, public finance legislation and public procurement legislation. For an effective PPP roll-out, consideration should be given to the following issues:
The FIC believes that the key areas of clarity, prioritisation and financing schemes are extremely important and relevant, not only in facilitating development of strong infrastructure but also in removing a number of bottlenecks that exists today, which cause delays in project roll outs. We believe a concerted and cross institutional effort is required to ensure that this takes place.