EBRD slams Romanian government for lack of progress on infrastructure development

EBRD slams Romanian government for lack of progress on infrastructure development
By Carmen Valache in Nicosia May 23, 2017

That the European Bank for Reconstruction and Development (EBRD) works in countries with political and economic challenges is a well known fact. But, for two days every year, representatives of the private and public sectors in those countries gather at its annual meeting to show off the progress they have made toward democratic reforms, the market economy and macroeconomic stability. While problems continue to abound, the tone of the gathering is rather upbeat; criticism is rarely voiced, particularly during the country specific investment outlook sessions. 

But that was not the case during the Romanian investment outlook panel at this year's EBRD annual meeting held in Nicosia, Cyprus on May 12. Following a soporific session in which government representatives did a poor job at communicating otherwise great news for the economy (GDP growth expected to reach 5.2% this year, low inflation - but no deflation, low unemployment rate and skilled workforce, improved tax collection, efforts to improve the business environment are rendering results), Alain Pilloux, vice president for banking at the EBRD, burst into an unusually sincere soliloquy for this type of event. 

The EBRD does not invest nearly as much as it should in Romania relative to its size, he told the audience. Last year, the lender invested some €200mn in the country, whereas it should have financed projects worth two to three times that amount. The problem, according to Pilloux, is the public sector. 

"We have no problems with the private sector. But working with the public sector, in particular in the infrastructure and energy sectors, has been extremely, extremely slow [his own emphasis]. And this of course does not open up opportunities to finance infrastructure, energy and communications projects," he complained. 

"I was in Romania for one week in February," he continued, "and met with the prime minister, the president of the chamber of deputies and various ministers. And I strongly gave them the message that Romania needs to unlock a number of infrastructure and energy projects that are essential to improving its attractiveness as an investment destination. ... I will return in September to hammer home this message," he continued. 

Pilloux' frustration comes after the EBRD has spent years pursuing the co-financing of energy and infrastructure projects like road and railway projects - for example the Metrorex line between central Bucharest and Otopeni International Airport, and the upgrade of the country's power grid and of its hydropower generation facilities. Improving road, rail and energy infrastructure is the linchpin of the EBRD's country strategy for Romania for 2015-2018, but with few results to show to date. 

In an interview with bne IntelliNews two years ago, Matteo Patrone, the EBRD regional director for Romania and Bulgaria, had similar complains. Romania may be doing "incredibly well" in macroeconomic terms, he said, but the "chronic underinvestment in infrastructure is an impediment to even growth" in the country. 

In addition, the EBRD’s investments have recently been hammered by changing legislation affecting areas such as renewable energy generation and food retail, while it was an investor into the recent IPO of diversified telecoms company Digi Communications, which was marred by a corruption investigation announced part-way through the offer period. 

In slow motion

That Romania has improved its infrastructure since the early 1990s, when power outages were common and its narrow, cobbled roads came with a mandatory quota of tyre-flattening holes, is beyond doubt. But the pace of the progress has been slow and chequered, with corruption being a common culprit behind the country's underdeveloped infrastructure. 

While Romania's anticorruption agency, the National Anticorruption Directorate (DNA), may be making the headlines for its tough stance on corruption these days, in the early 2000s the country was more corrupt than Zimbabwe, China and Belarus, according to Transparency International's Corruption Perception Index. And those were precisely the days when Romania started its uphill battle to improve its transport infrastructure, a battle that saw the leaking of billions of euros of funds meant for highways and other projects into the private pockets of public officials, with little in the way of progress toward infrastructure development. 

Many such officials have ended up behind bars for such actions, but the National Road Infrastructure Administration Agency (CNADNR), the company tasked with improving road infrastructure, remains rife with corruption, according to its own employees. More importantly, the pattern of siphoning off public and foreign funds meant for infrastructure projects, which became widespread during those days, has proven difficult to break. 

As a result, Romania has little over 700km of highways to show for itself, less than its neighbour Hungary, despite being two and a half times larger. And, despite its progress toward macroeconomic reforms, the country remains an infrastructure conundrum for investors like Pilloux, who are ready to help co-finance such projects, but whose efforts fall on deaf ears in Bucharest. 

Meanwhile, Patrone, who was on the same panel as Pilloux, was more upbeat about the country's prospects. "We have ambitious plans for Romania this year. We want to invest well above €500mn-600mn, 80% of which should be in the private sector. But we have ambitions for infrastructure projects both at the sovereign and sub-sovereign [i.e. municipal] levels as well," he said. 

Patrone offered the EBRD's successful projects to improve water and transport infrastructure in the municipalities of Iasi, Arad and Constanta as examples of what can be achieved. "Working with municipalities represents about 40% of our portfolio in Romania. But we need more traction at the national level," he conceded, adding that the EBRD was now working " to bring parties together in order to prioritise those projects that can take Romania to the next level as an investment destination." 

Offering authorities good examples of projects that have worked may be the way forward, Patrone argues. One such project, Patrone says, is BRUA, the Bulgaria-Romania-Hungary-Austria gas pipeline that the EBRD is co-financing and Romania's gas transmission company Transgaz is building. Once completed, BRUA will integrate the gas networks of Romania with those of Central and Southern Europe, and will enable to the country to play a greater role as a gas transit point for gas from the Caucasus to Central Europe. Furthermore, once Romania's offshore oil and gas fields in the Black Sea come on stream — it is estimated they will do so by 2020 — Bucharest stands to become a net gas exporter. 

"Romania has to prioritise investments that can become best practices, particularly in the road and railway sectors. There are more than €40bn worth of projects left to do in these areas. We have managed to get some five or six projects off the ground so far. These can create a very positive momentum that can inspire other projects," Patrone concluded.