Development of Romanian transport infrastructure and EU funds:

the challenge of absorption requires structural changes

Preliminary Draft – For discussion only

Alexis GressierAntti Talvitie

Bucharest, May 10, 2011

Content

• Introduction and background• Review of current absorption (SOP-T and ROP)• Analysis and recommendations – Governance and planning

– Institutional structures and sector governance– Planning capacity– Financial planning

• Analysis and recommendations – Implementation– Management and human resources– Project preparation– Reviews, authorisations, approvals– Procurement,– Contract management,– Financial management

• Legislative apects• Role of private sector• Conclusion

Transport infrastructure and the economy

• Develop transport infrastructure to accompany economic growth.– Mobility of persons and goods– Transport costs, speed and safety

• Not only motorways:– National and county roads– Railways– Danube

• Not only construction:– Operation– Maintenance– Services

EU funds

• Phare and ISPA: precursors. ISPA: – More than 1 billion euro for transport– Take stock of actual implementation. Learn lessons

• SOP-T:– 2007-2013 (2015 for eligibility of expenditures)– 4.5 billion Euro from EU– 1.1 billion Euro national co-financing (eligible costs)– 67%: TEN-T priority axis– 24%: other national infrastructure

• ROP:– 0.87 billion Euro priority axis 2 (county roads and streets)– Large share of priority axis 1 (urban growth poles)

Absorption of EU funds

• Three aspects:

– Modernisation of transport infrastructure needed by citizens and by the economy

– Inflow of financial resources with direct impact on GDP

– Lower pressure on budget

• But also: act as vector of the modernisation / reform of the infrastructure sector

Absorption of EU funds:projects approved (contracting) and absorption rates

(June 2010)

Overview of EU absorption:implementation rate (June 2010)

Current absorption SOP-T

• Two main figures – status at 18/03/2011

– 20.46%: eligible value of approved projects against global SOP-T allocation, with 24 investment projects

– 2.47%: amount of payments (EU contribution) against global SOP-T allocation

• March 2011: 47% of total time period (2007-2015)

• But: need to take into account the project cycle

Forecasts - MA

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

2007 2008 2009 2010 2011 2012 2013 2014 2015

SOP TRANSPORT cumulated

Committed Contracted Paid

-mil euro-

Analysis: how reasonable is the forecast?

• Eligible value of projects under appraisal: 3.4 billion Euro (74.4% of global allocation), with

– 4 motorway projects

– 3 railway projects

The project contracting forecast might be achieved

Main risk: rate of payment, i.e. actual implementation

ISPA experience

Not specific to EU funds

• Transylvania motorway• Bucharest – Ploiesti motorway• EIB funded projects (road rehabilitation)• Very limited railway rehabilitation projects funded by other funds

than EU Systemic deficiencies, not specifically related to EU funds:

- Weakness of public administration- Inappropriate governance- Insufficient planning

Over-optimistic forecasts postpone the necessary reform of the system

Delays create backlog: 2007-2010 implementation of ISPA instead of SOP-T, no current preparation for next programming period

Current absorption - ROP

• Very different from SOP-T: large number of small projects

• Lack of transport related strategy

• Strong appetite for transport infrastructure projects: 53% of total projects value approved to date (priority axis 2 but also 1)

• Full contracting of priority axis 2, overall rate 56%

• Still low payment rate: 5.6% overall

Analysis and recommendations –Sector Governance

• Core: Functional Review Action Plan• Infrastructure projects: require long term

planning and operational stability Need for a clear strategy (master plan) Reduce political interferences in implementation Need for “arm-length” management of main

infrastructure companies (CN ADNR SA and CFR SA):- Medium term management contracts- Set objectives and financial means (Performance

Agreements)

Functional Review – extracts of action plan

Analysis and recommendations –Planning capacity

• Role of the MoT• In the 1990s, priorities were obvious: rehabilitate

the existing infrastructure• 2000 – to date: build core motorways and

rehabilitate railway along Corridor IV• Future ?

– Financial allocation for transport infrastructure (construction and maintenance)

– Role of railways: revitalisation, rationalisation, local level

– Investment priorities

Planning capacity – local level

• Large number of projects but risk of lack of coherence

• Future programming period: Europe 2020 strategy– energy efficiency (decarbonising the economy),

– urban dimension of transport

– coordinated implementation of infrastructure projects that must contribute to the effectiveness of the overall EU transport system

=> Need for Regional strategies

Analysis and recommendations –Financial planning

• Rationalise public investment program

– Value of signed contracts for roads: in excess of 7 billion Euros

– Take into account all project costs

– Ensure adequate funding of maintenance

ensure medium term financial framework (in line with medium term budget)

• Ensure sustainable funding mechanism and coherence between road and rail

Analysis and recommendations –Human resources

• Promote a unitary and attractive remuneration system,

• Develop staff retaining strategies based on incentives and carriers,

• Review decision making systems in order to ensure better timeliness,

• Involve audit and control authorities in order to identify best practices.

• Make increased use of consultants and external services, to lower internal constraints

Analysis and recommendations –Project preparation

• Focus on project preparation: shortcuts in preparation lead to execution delays and cost overruns

• Project preparation requires time and funds

– 4 to 5 years as a minimum (feasibility, EIA, design, land acquisition, utilities)

– Around 5% of project costs

Implementation - preparation

• No “magic formula”:

– Design-build: not convincing

– PPP: not fast track

– Transfer of responsibilities towards contractors: not realistic

• Delimitate responsibilities (State / contractors)

• Criteria for project maturity

Implementation – reviews, authorisations, approvals

• Several different procedures:– Environment,– Urbanism,– Use of public funds,– EU funding

• Several reviews (design check, ISC, etc)• Large number of authorisations (local authorities,

utility managers)=> Mapping, analysis of added value and

simplification

Implementation - tendering

• Standardise:

– Documents

– Criteria

– Interpretation of rules

• Increase coordination between authorities

Implementation – contract management

• Standardise contracts and procedures• Strengthen human resources and improve management

style• Improve quality control• Contract = partnership• Role of control environment: harmonise interpretations• Favor timely solution of difficulties• Develop risk management, with adequate risk prevention

measures, including financial reserves• Develop financial management• Streamline role of external authorities: environment, state

inspectorate in construction, utilities managers, accreditation bodies

Implementation – financial management

• Multiannual perspectives

• Co-financing of EU funds: eligible and non-eligible

• Risk management: reserve fund

• Absorption: speed of payment and reimbursement mechanisms

– Need for cash-rich system

– Speed of process (N+3/N+2 rule)

Legal aspects

• Changing the law is not the solution to lack of planning and deficient management (OUG 34, land acquisition)

• Law on utilities

• Advance payments

Role of private sector

• PPP: bad track record

Ensure streamlined legal framework (possible infringement procedure on current law)

Restore credibility

• Role of private sector in project management:– Not efficient if not accompanied by public sector

reform,

– Not efficient if limited to contract implementation.

• Increase technical assistance to management

Positive steps

• New law on land acquisition

• Tenders for motorways prior to project approval

• Start of contract standardisation

• Intention to tender the management of some State owned companies

=> but: partial measures do not solve the issues

Conclusions

• Short term priorities– No replacement projects– Focus on implementable projects– Start preparation of next programming period

• Recommendations:– prevent staff turn over by implementing improved human

resources policies (salaries but also carrier management, non –financial incentives and rewards)

– prevent managers turn over– streamline and simplify procedures– hire significant technical assistance in order to assist with

contract management– Establish reserve fund

Conclusions – Medium term– Streamline the sector management, in accordance with the

recommendations of the functional review

– Streamline the sector financial planning, by ensuring preparation of mid-term projections, linked with the State budget,

– Standardize tender documents and conditions of contracts

– Streamline, coordinate and simplify the role of the different actors in infrastructure projects (review bodies, control and audit entities, authorization issuers, etc)

– Prepare a law on public utilities that make utilities owners responsible

Overview

• Wide agreement over problems

• Many papers on solutions

• What might trigger reform implementation?

– Reports, Policy notes

– Funding institutions

– Loss of funds and delayed infrastructure improvement