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.
In mid-2018, on the initiative of the Coalition for the Development of Romania, the National Agreement on Transport Infrastructure Development in Romania was drafted. This aims to set the major infrastructure projects in motion, and ensure the cohesion of infrastructure projects and their prioritisation through a commitment by all political forces to fulfilling this national need. Currently, the document is in the process of being agreed and signed by political parties and various professional associations.
2018 has also marked the inauguration of a few long-awaited infrastructure projects (i.e. the A 10 Sebes - Turda highway, lots 3 and 4, and the A 3 Gilau-Nadasel highway, including the bridge over the Somes river).
In October 2018, the Government launched the procurement tender for the private partner for the Ploiesti – Brasov highway, a project which the Government intends to develop as a PPP, under the new PPP legislation.
Source: Calculations based on Eurostat data
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:
The time period covered by the Master plan is quite long. There should be a prioritisation of the most important projects over shorter periods (e.g. 5 years). This prioritisation should also be adopted as a law by Parliament to ensure consensus on large projects and reduce discretionary changes of priorities in the short term.
The funding mechanism is not yet clear. Given the shortage of financial resources in the national budget, one of the main criteria for prioritisation should be the source of funding (as use of EU funds and private funds should constitute a strong alternative to state budget financing):
Projects financed by the EU should be at the top of the list.
Second on the list should be projects where private sector involvement is possible.
Projects funded through the state budget should come third, releasing pressure on public funds.
Although not covered by the master plan, regional infrastructure development should also be made a priority. Here not only state or EU funded projects should be considered, but also other projects which are economically viable.
Planning and prioritisation of large infrastructure projects at Government level
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).
Municipal infrastructure
In spite of significant investments made over the past few years from public funds, EU grants and other funds, Romania still needs to implement major investments in order to comply with EU standards and regulations, and ultimately improve the regional/municipal infrastructure. For example, the water sector alone is estimated to need over EUR 20 bill (CAPEX only) to comply with the relevant EU regulations, but only about EUR 4 bill are available from the EU under the 2014-2020 programming period. The amount is significantly higher if all in costs are considered. At the same time, the available funding for investments from national sources (central or local budgets, operators) is quite limited.
Apart from financing, timing of investments is also critical – given that deadlines for compliance are very close or have passed already and projects eligible under LIOP 2014-2020 or the Regional Operational Programme (ROP) 2014-2020 are suffering from long delays.
As EU grants are clearly not enough to cover all needs, more innovative solutions may be warranted to provide the necessary financing, as well as to increase the efficiency of municipal services. Consequently, private sector participation could be a solution – starting with the outsourcing of some activities within municipal services, and then, at a later stage, the introduction of 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 – is closely linked to the use of financial instruments in funding urban development projects (for example, energy efficiency projects). These have the potential to attract private sector finance and expertise to public administration, to reduce the pressure on municipal budgets and increase efficiency. Furthermore, these schemes could improve absorption and leverage available EU grants, while increased familiarity with them will prove critical in view of the Invest EU project which is taking shape.
Furthermore, the use of financial instruments would direct local and county public administration towards revenue generating projects and more commercial / sustainable approaches, and by so doing, stimulate the economic growth of communities. In contrast to the traditional grant approach, the use of financial instruments would incentivise local public administration to identify those types of infrastructure projects able to generate sufficient income to repay the financing resources, and would provide Romania with long-term financing mechanisms for infrastructure projects.
Replicating other countries’ successful use of financial instruments for infrastructure development would be a good starting point, until Romania develops sufficient “in-house” expertise to better customise these instruments to its specific needs. This is increasingly important as Romania will benefit from fewer EU grants, as a percentage of project value, from 2021 and will have to increasingly rely on financial instruments. In order to fully benefit from the EU funds available post 2020, and in view of the above, the preparation phase for municipal infrastructure projects should commence.
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:
Absorption of EU funds
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%.
The progress in absorption of the funds allocated for 2014-2020 was slightly under the European average in May 2019. Romania had an absorption rate of 28% versus the European average of 31%.
This still puts Romania in the bottom half of the pack, ranked 19 out of 28 member states. Considering the high investment needs Romania’s rate of absorption should be much higher. Romania faces the risk of not being able to access significant amount 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 conditionalities are still under negotiation with the European Commission. The most important programmes cover infrastructure, such as waste management, water management, and transport.
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.
Sovereign funds
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.
In 2017, a draft law on the Sovereign Fund for Investments and Development (FSDI) was debated by the Romanian Parliament, but has not yet been approved. In November 2018, the Government also adopted the Emergency Ordinance concerning measures on the general framework applicable to a Sovereign Fund for investments and development, but this only sets up the general framework for a sovereign fund. Both legislative acts are very general and do not clarify some important aspects of the FSDI: the selection procedure for the Supervisory Board and the algorithm for selecting companies.
The fund’s purpose would be to develop and support the main sectors of the Romanian economy – through investments in infrastructure (road and rail), agriculture, industry, and healthcare. The fund could 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.
The FIC recommends that the legislation on the FSDI should include rules and clarity on corporate governance, public procurement, privatisation, and transparency. It should also include clear indications as to what sort of projects would qualify for financing from the fund. Companies in the FSDI should respect the rules of Emergency Ordinance No. 109/2011 on corporate governance.
PPP law
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 are even more relevant at present, given their potential role as a financing tool in the 2018-2020 EU funding programme. As a result of EU concerns, Law 178/2010 was repealed and in November 2016, a new PPP Law 233/2016 was approved. In May 2016 the new legislative package on public procurement and concession of works and services was also enacted, replacing the previous regulations, including the former PPP Law (no. 178/2010). In May 2018, a new Governance Ordinance - GEO 39/2018 was approved, with a clearer legal framework on the procurement process - the substantiation study should determine which of the above procurement laws is to be followed, depending on the manner in which a significant part of the operational risk is transferred to the private partner. The new PPP law represents real progress, because it gives the public partner the possibility to participate financially in the project not only in the operation phase, but also in the construction phase, for the carrying out of the work. One of the main changes is that the approval process is governed by the National Commission for Strategy and Prognosis for strategic projects, in the name of the public partners. A list of 21 strategic projects was also approved by the Government through Government Decision no 357/2018.
The FIC welcomes the resulting improvements both from a legal and an operational perspective and the fact that there is no need for a distinct award to grant the right of use over public assets. 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 on community public utility services – which permits the delegated operation of municipal utility services such as: public transport, water and water treatment, sewage, etc.
We consider that a Guide could bring more clarifications to the PPP law. 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 financing which will be available after the completion of the project. Use of state-owned assets as a guarantee to secure PPP projects should also be considered, to further facilitate their development.
The long-standing risk allocation issue should be addressed. The key challenge of commercial risk, as opposed to political or social risks needs to be addressed, if PPP projects are to be facilitated appropriately.
The challenge of budgetary allocation, and ex-ante PPP project assistance from Eurostat needs to be addressed. The challenge of regulation on cooperation and assistance mechanisms to be used by the national statistical authority, as well the challenge of getting clearance for any potential state aid issues in connection with the support scheme also need to be tackled.
The key issue of flexibility must be addressed for the procurement process and in relation to the required documentation for a PPP project.
Creation of a special fund - to be carried out by new legislation, which should be adopted within 1 year of the enactment of GEO 39/2018 – the new legislation needs to be correlated with the public finance law. To date, new legislation for the related special fund has not been issued, and there is not even a draft for public debate, even though tenders have been launched for PPP projects
If there is public sector participation in the project company, certain issues need to be considered, such as: conflicts of interests, decision making, and limitations on voting rights /board members.
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 the roll out of projects. We believe a concerted and cross-institutional effort is required to ensure that this takes place.