Large infrastructure projects are the backbone of a country’s development. Due to their complexity and the need for long-term commitment, they require stability and continuity in order to be developed and finalised. Consequently, political changes and decisions have a long lasting impact on their direction, evolution or prioritisation.
In the past few years, Romania has witnessed multiple political changes which have been reflected in the changes to the country’s infrastructure priorities. Different visions have been tested, but none have managed to remain a constant, able to ensure Romania’s development in terms of road, rail, maritime, aviation, energy or telecom infrastructure.
As a representative of the business environment that is a major stakeholder, with a long-term vision for investments in Romania in terms of large-scale construction projects that have multiple positive effects in the economy, the FIC has set out to support the efforts of the authorities by drafting a list of infrastructure projects that are of utmost importance and would bring value for the economy. The FIC has also started consultations with other business organisations on this subject, aiming to reach a broad and pertinent perspective on the different types of infrastructure that Romania should focus on over the next few years.
The final document represents an analysis of the status quo on which Romania should build and it is the result of discussions between several organisations, taking into consideration the needs of the Romanian economy, as well as strategic documents such as the Master General Transport Plan and the Large Infrastructure Operational Program. The list was drafted also bearing in mind regions that are not connected to other parts of the country or to the big cities. The list of projects includes motorways, railways, ports, intermodal transport, express roads, ring roads as well as the rehabilitation of existing infrastructure. Major infrastructure projects relating to energy and telecommunications have also been included. The list of priority projects was endorsed by 19 organizations: FIC, CDR, AmCham, CPC, BRCC, RBL, CCIFER, AHK, ARB, CNIPMMR, PAR, CONPIROM, ACAROM, ARACO, TIAD, AOAR, BEROCC, Advantage Austria, and Pro Infrastructura. This list was presented to the authorities, political parties and all stakeholders, based on the idea that this could represent a starting point for a joint effort between the vision of decisionmakers and that of the business environment in relation to infrastructure development for Romania.
The adoption in 2016 of the long-awaited Transport Infrastructure Master Plan by the Romanian Government represented the first step towards building the robust infrastructure Romania needs. Though undoubtedly important, a current evaluation/assessment of the accomplishment of these strategic projects mentioned in the Master Plan, exposes rather weak implementation in practice. In some cases these projects have not even started.
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:
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.
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, telecommunications 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 identifying and securing 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 from public funds, EU grants and other sources of financing, 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 7 bill will be available from the EU under the 2014-2020 and 2021-2027 programming periods. The amount is significantly higher if all 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 using some funds 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, while all projects are supposed to be implemented and all payments made by 2023.
As EU grants are clearly not enough to cover all needs, more innovative solutions may be needed 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 by 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 under the MFF (Multi-Annual Financing Framework 2021-2027), 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, and setting up a development bank. 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.
Progress in absorption of the funds allocated for 2014-2020 was slightly below the European average in June 2020. Romania had an absorption rate of 41%% versus the European average of 46%.
This still puts Romania in the bottom half of the pack, ranked 22 out of 27 member states. Although in recent months the absorption rate has risen from 41% in June to 46% in October 2020, it remains one of the lowest in the EU. Considering its high investment needs, Romania should mobilise its project management capabilities so its absorption rate is higher. .
The new programming period (2021-2027) came with increased requirements for beneficiary countries at both strategic and operational levels but also with new and more generous amounts (the funds allocated through the Cohesion Policy are complemented by the EU Recovery plan Next Generation EU). 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 various types of infrastructure (waste management, water management, transport, energy, healthcare, ITC) and resilience building for public institutions
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 completion of the designation process as soon as possible.
Furthermore, in order to secure smoother implementation of the operational programmes and to prevent future suspensions, as well as 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 has 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.
The FIC also considers that the focus should be on value for money spending, i.e. on projects with impact, not just on absorbing EU funds.
PPP law
Most infrastructure projects are by their nature very complex. Infrastructure investments have a large multiplier effect on the economy, promoting general economic growth. They are particularly beneficial in the current context, as they will help speed up the post-covid recovery. 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. Romania’s effort to implement infrastructure projects is constrained by scarcity of public funds and concerns to avoid excessive levels of public debt.
FIC members would strongly welcome greater involvement in infrastructure projects by the private sector, because many elements of them 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, in 2016 a new legislative package on public procurement and concession of works and services was enacted, replacing the previous regulations, including the former PPP Law (no. 178/2010), which was revoked and replaced by a new PPP Law (Law 233/2016). 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 allows 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 was to bring the approval process under the authority of the National Commission for Strategy and Prognosis for strategic projects, in the name of the public partners. Moreover, a list of 21 strategic projects was approved by the government through Government Decision no 357/2018, later updated by GEO 7/2020 which transferred the supervision of these projects to the relevant ministries. A new legal framework, through GEO 43/2019 is now in place for PPPs, which encapsulates references to value for money (VfM), affordability assessment and long-term budgeting.
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, sewerage, etc.
PPPs were referred to in the recent National Investment and Economic Recovery Plan, which will provide investments of EUR 100 billion by 2030 in infrastructure, including strategic investments in the agriculture, health, and education sectors. It also covers the setting up of the Romanian Investment Fund (FRI) to finance investments in areas of strategic interest and the National Development Bank (BND) as a credit institution for investment projects.
At the same time, in July 2020 the Investment Plan for the development of transport infrastructure was launched. This Plan identifies a financing need of EUR 72.4 billion for the period 2020-2030. Taking into account that the estimated allocations of non-reimbursable external funds total EUR 12.9 billion, there is a financing gap for transport infrastructure projects of EUR 59.5 billion.
In the Country Specific Recommendations (CSR) for Romania (2020), Chapter 3.1.1. (Fiscality), includes a general recommendation to improve the preparation and prioritisation of large infrastructure projects and accelerate their implementation. According to the 2020 Convergence Programme for Romania, the level of investment expenditure from GDP rose to 3.4% in 2019, from 2.7% in 2018.
We consider that a Guide could bring useful 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:
We recommend that the government should ensure that the population and public institutions have access to a high-speed internet connection and high-bandwidth data services, such as advanced e-health and real-time education, irrespective of the area in which they are located. The development of broadband internet services is of great importance for the economic development of Romania and of key importance for the development of a knowledge based society.
Romania is well recognised for having good broadband connections available in most cities and for a significant part of the population. However, in order to achieve a wide adoption of these services, the government must ensure that the whole population has proper access to such connections. There are still rural areas where the population does not have access to a connection allowing them to use services like e-banking or tax paying services in a reliable manner, so internet access in rural areas remains an ongoing concern.
The government should support an increase in the footprint and in the resilience of the telecommunications infrastructure through capital investments in development programs.
The related costs can be substantially reduced if communications infrastructure is included in the European and national road construction projects developed by the national roads authority, in county road modernisation projects coordinated by county councils and in urban modernisation projects carried out by the local authorities.
As governments take the learnings from the first stages of the covid crisis to manage ongoing risks and build back a better society, it is clear that the secure and reliable digital services that the communication industry provides should play a fundamental role in shaping our society’s future. These industries have a critical role in delivering connectivity and services and there is now an opportunity to accelerate the digital rebuild and transformation of our national economies and societies with the help of the Next Generation EU Package.
We strongly believe that in order for the EU and national recovery funds to make a significant and long-term impact, the Gigabit networks – connecting everyone, everywhere- together with digitalisation of businesses, especially SMEs and institutional resilience (ensuring more resilient government services) as well as the promotion of digital skills for all ages to achieve social cohesion need to be priority areas.
To deliver on these key priority areas, we believe that a joined up approach between government and industry must be taken to maximise the benefits of recovery funds, stimulate private investment and ensure there is a supportive and enabling regulatory framework. The allocation must be fair and guided by the objective not to reinforce prevailing market dominating positions. The FIC supports the changes made to the Recovery and Resilience Facility Instrument by the European Parliament in this regard.
In order for recovery funded digital investments to be effective as well as to make a significant and long term impact, they should be accompanied by national policy reforms devised in compliance with EU rules (e.g. on state aid and preservation of competition).
In relation to these policy reforms, we strongly support the amendments made by the European Parliament, to ensure Member States set out a justification of how their recovery and resilience plans represent a comprehensive reform and investment package and to increase transparency in relation to both the plans and monitoring of effective implementation.
While this is, indeed, a chance in a generation, we must realise that the recovery funds will not be sufficient to complete the transition in Europe’s Digital Decade. With perhaps less usage of the loan element of the Next Generation EU recovery package, the funds available in grants will be key. While we support the minimum 20% allocation of this amount to digital, we should recognise there is still a significant requirement for private investment to fill in the remaining gap to bridge the digital divide. We believe this calls for even stronger partnerships between governments, industry and citizens to stimulate investment where it is most needed and achieve a digital, green and resilient Europe.