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EU: Candidates Lagging In Much-Needed Infrastructure Investment

  • Nikola Krastev

Infrastructure projects in many EU candidate countries in areas such as transportation, utilities, and water management have so far attracted little interest among Western investors. A recent conference of high-level investment officials in New York cited a number of obstacles to funding these crucial areas and heard an appeal from the region's municipal leaders for assistance.

New York, 13 November 2002 (RFE/RL) --The World Bank says infrastructure investment needs for the accession candidates to the European Union are estimated at 65 billion euros ($65.8 billion) during the next 15 years.

But the consensus at a recent conference on 30-31 October focusing on the region's infrastructure needs was that legal restraints and a decade of mixed experiences have dimmed the interest of Western investors in such projects.

The conference, organized by the private law firm LeBoeuf, Lamb, Greene and MacRae, heard the World Bank report massive infrastructure investment needs for areas like water and waste management and pollution control.

Poland is cited as the country with the highest amount of infrastructure investment needs, 21.4 billion euros, followed by the Czech Republic, Bulgaria, Romania, Hungary, Slovakia, Estonia, Slovenia, Lithuania, and Latvia. The World Bank estimates show that 70 percent of these investments must be directed to smaller government entities such as municipalities and regions.

Trajan Basescu, the mayor of Bucharest and a participant in the conference, put the infrastructure investment needs of his city, the most populous in Central-Eastern Europe, at 2.17 billion euros by the year 2015. About one-third of this amount, he said, has so far been secured in the areas of water supply and sewerage services, urban transportation, and the creation of an integrated information system.

Basescu told RFE/RL that he is forced to look to the West because of the restrictiveness of Romania's banking system. "First of all, because in Bucharest I will never be able to obtain a loan for 25 years, which I can obtain from the European Investment Bank. Secondly, no bank in Bucharest will give me a loan with a five-year grace period. And thirdly, no bank in Romania will give me a loan with 4 percent interest. Thirdly [fourth], if I issue municipal bonds for [the] Romanian market, I will have an interest rate of 24-25 percent, which I am not prepared to pay because I handle public money, and I have to use the money with maximum efficiency," Basescu said.

Basescu acknowledged that while he tries to juggle limited resources, at least 20 percent of his budget is not properly managed. Basescu said that corruption, an endemic problem in Southeastern Europe, chips away what is left.

Richard Steffens is a commercial counselor at the U.S. Embassy in Prague and a participant in the conference. He told the conference that some U.S. investors have nave assumptions about how they should be operating in Central and Eastern Europe. At the same time, he said, the region has many opportunities. "Often, here in New York we think: 'OK, Romania. That means I'll go work with Bucharest. Czech Republic? I'll go work with Prague.' But when you are looking at the country, the capital city is just the tip of the iceberg. I remember just going out on a two-day trip with my ambassador last week. We went to six smaller Czech cities. All of them needed everything. All of them needed sewage-treatment plants, housing rebuilding, regional airport reconstruction, industrial restructuring, environmental protection. What you've got is one of the last great frontiers in terms of municipal finance," Steffens said.

Geographic location and historical ties can play a crucial role in determining who gets what. The Baltic states, for instance, due to their proximity to the wealthy Scandinavian countries, have been able through the past decade to inject ample amounts of investors' cash into their infrastructure projects.

This has not been the case, it was noted at the conference, in Bulgaria and Romania whose urban infrastructure is in dismal condition and where the investment climate is less liberal than in the Baltic countries.

Another obstacle, said Steffens, is the apathy on the part of local managers and a misunderstanding of municipal financing practices in many Western countries. "In most cases, when you are looking at the smaller and midsized cities, we have mayors who have not even begun to tap their potential to issue municipal debt. We have revenue-generating things like the airport or the wastewater-treatment plant, where the local administration hasn't even quite figured out how to turn that into a public enterprise. We've got enormous challenge and enormous economic opportunity in front of us," Steffens said.

Baltic capitals are more advanced in their infrastructure development and are looking for creative ways to attract new investors' capital. Tallinn boasts the advantages of its technology park and Estonia's high Internet penetration.

Latvia's capital Riga is enjoying rapid growth as an international business center. It has a plenitude of information-technology professionals that are cheaper to hire than in neighboring Estonia.

Lithuania's capital Vilnius is promoting its proximity to population centers. There are an estimated 16.5 million people living within 300 kilometers of Vilnius, more than from either of the other two Baltic capitals.

The mayor of Vilnius, Arturas Zuokas, told RFE/RL that in this regard, Vilnius's advantage for any investor in the region is obvious. "The market shows quite clearly, if you relocate your business, for example, [to] Vilnius, you could be active in the whole region, including Minsk, Riga, part of Poland, and Kaliningrad," Steffens said.

Zuokas said that Tallinn has found a strategic partner in Helsinki. This partnership is aimed at how these two cities could cooperate and create better conditions for investments.

Bruce Johnston, who is a partner at the law firm that organized the New York conference, told RFE/RL that Central-Eastern Europe is a good place for American investors now because in the near future they will be at a disadvantage compared with their EU counterparts. "It's a good place to invest now because in a couple of years' time there will be absolutely no trade restrictions. It will be all part of the European economic union. The point I was making in my speech was the other way around, which is, if you are a manufacturer of goods in the U.S., in time you will be at a competitive disadvantage. If you export a lot of goods into Central Europe, consumer goods or something, clothing or things like that, what you may find is that now your [Western] European competitors have an advantage over you because they can export into Central Europe easier than the United States can," Johnston said.

Basescu's presentation impressed the organizers enough to announce that in April 2003 they will host a similar event in New York devoted to the infrastructure projects only in the Central and Eastern European capitals.