Pulling all forms of finance together

EU funds, state cash, bonds, private loans, a listing on the stock market – all forms of financing must be committed to tackle Romania’s chronic infrastructure shortages, argues Marius Bostan, senior partner at public finance advisors VMB Partners

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Romania’s low quality and underdeveloped infrastructure is a big topic of discussion by citizens, tourists, politicians and experts. Infrastructure development is the most important factor in a country’s development and must be treated as a Government priority and in national, regional and local strategies.
To reach the medium level of the EU infrastructure, Romania needs to finance an astronomical sum. By comparison, the money available from European funds for this purpose is very little, so these will only solve a small part of the financing. The remaining part, much bigger, should come from state and local budgets, but they have a time-limited capacity and are not able to sustain a development pace as fast as desired.
In order for these budgets to grow, the country needs a real economic development and not just a statistical one. But the country lacks the infrastructure to support even the incipient development such as the one we had so far. To break this vicious circle, European and state funds should be supplemented by credit loans, especially bonds, and also private financing which could be drawn through public and private partnerships. This balanced mix could create the cocktail of cash necessary to fund infrastructure.
The first effort should involve a good multiannual investment planning and a smart priority setting based on feasibility studies and local and considering national authorities’ capacity to pay back loans over a period of 20 or 30 years.
This must be coupled by a legal framework which is more efficient. To allow public works such as motorways to start construction, the expropriation of land should happen quickly and correctly and the compensation process should not affect the works’ time schedule. For public auctions where private companies can bid, the tenders should happen fast, as should any appeals.
If the Government has a solid financial plan over several years, then the Minister of Finance could establish a calendar to attract funds for issuing series of bonds. The capital market players would be informed in advance about this calendar, which could contribute to lowering the cost of the attracted capital. It could be the same for local authorities – if independent professionals formed multi-annual plans of investments, identifying financing sources using a realistic prognosis, local councils would see reduced costs and greater transparency.
In Romania, municipalities financed infrastructure with bonds long before the State did; they have issued bonds with a period of maturity of 20 years. One hundred years ago, Craiova municipality was issuing bonds for a period of 60 years to finance the sewerage system. The city of Bucharest also issued bonds in the inter-war period. In all developed countries, the financing of highways and major public investments were made by bonds with long periods of maturity.
In Romania, one of three people do not have access to adequate water supply or sewerage. For a district-level water and sewage operator, the credits and European funds will not be sufficient for development and will not ensure management transparency. If these utility firms remain entirely state-owned there is a chance they will work like charities. The prices for their service will not reflect the real costs and they can be used as tools by local authorities with political interests. This lack of efficiency brings insufficient funds for future development, so the frail infrastructure will bring poor services. But the progressive privatization of public utility companies owned by local authorities could bring better management and supplementary capital to develop public utilities’ infrastructure. By listing these companies on the stock market, there is a chance that citizens can also become shareholders, which would ensure greater transparency. If the State or the local authorities release their stake gradually, then the market can ensure a correct price for the shares.
In the case of the subway, railway lines, above-ground and maritime transport, public utilities, infrastructure for health, education, communication, environment, highways or national and county roads, it’s not the EU money, but the level of attracted private capital which will make it possible to reach European standards. But in order to absorb large amounts of money with low costs, it will take political will and intelligence in Parliament, Government and local councils.
The progressive privatisation of public utility companies owned by local authorities could bring better management and supplementary capital.