As talks over the eastward expansion of the European Union proceed, a great deal of progress has already been made on improving basic infrastructure across such as road and rail networks across Central and Eastern Europe.

Financing has largely depended upon EU grants and long term loans from institutions such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), as well as government spending programmes within the individual countries.

The next step is to achieve greater involvement from the private sector, and there is a move towards project financing rather than conventional loans. For example the EIB has signalled its intention to get involved in more public-private-partnerships (PPP), making use of its experience in countries such as Germany, where the bank has already participated in PPPs involving a teaching hospital in Jena, colleges in Thuringen, and road tunnels under the River Warnow in Rostock, and the Elbe in Hamburg.

The EIB now expects PPPs to become much more widely used in Central and Eastern Europe, and so the recent closing of its first major PPP in Poland was viewed within the bank as a very significant event.

In late October the EIB signed a Eu275 million loan for the construction and rehabilitation of motorway sections near Poznan, western Poland. This forms part of the important A2 Motorway corridor, which will eventually run from Berlin-to-Warsaw-to-Minsk.

The loan had a long term maturity of just over 17 years, and was made to the concession company, Autostrada Wielkopolska SA. AWSA, which will operate the road and collect the tolls, is structured as a public private partnership, and is registered as a joint stock company.

The project is the first large Public Private Partnership financed by the EIB in any of the accession countries, and it took quite a long time to arrange, with negotiations getting stuck at times over the issue of guarantees from the Republic of Poland.

The EIB loan will help finance the construction of 88km of motorway, and upgrade another 48km, between Nowy Tomsyl and Konin. Together with the 13km Poznan bypass already under construction, which is also co-financed by the EIB, the entire 149km stretch of road should be open to traffic in 2005.

There was also a 17-year commercial bank loan signed, for Eu235 million, with syndication led by Credit Lyonnais and Commerzbank.

?This is the first time that a toll motorway is being built and managed by a public-private-partnership in Poland,? comments Wolfgang Roth, EIB vice-president. ?The EIB loan will benefit the concession company, the Polish State and other partners involved in this project as a result of substantial cost savings, much longer maturities, and comfort to the commercial banks participating in the financing. The project follows the priorities set by the Accession Partnership and Pre-Accession Strategy agreed between Poland and the European Union, in particular for developing efficient transport infrastructure complying with national and EU standards.?

The A2 deal is made more important by the fact that a previous high profile toll road in Hungary proved to be a disaster, in the words of one Hungarian banker becoming ?a case study in how not to do a toll road.? The main problem was that it was easy for vehicles to use parallel roads. For example a truck coming from Vienna would drive to the Hungarian border, but instead of paying a toll on the 50km toll road to Gyor would bypass this route and the pick up the free Gyor to Budapest section.

So few drivers used it that the tolls had to be drastically cut. ?The toll cost was halved, so they would have needed to double the term of the loan,? says the Hungarian banker. The eventual solution was for the government to nationalise the road, taking out the bank lenders. This cast a shadow over toll road financings in the region, and so the A2 loan signing in Poland is a welcome sign to bankers that deals can still get done if they have a sound business model.

The EIB has become the largest foreign lender for infrastructure modernisation projects in Central and Eastern Europe. The bank works closely with the European Commission, and EIB loans are frequently combined with grant aid from the Commission under its PHARE and ISPA Programmes, so as to offer particularly attractive funding conditions, especially where transport and environmental schemes are involved.

All candidates for EU membership have access to EIB loans, and the bank does not differentiate between countries likely to join in the first wave, and those which will be able to come into the EU at a later stage. Since 1990 the EIB has deployed more than Eu11 billion in Central and Eastern Europe, and the annual figure has now reached around Eu2.25 billion for economic modernisation, support for Small and Medium Sized Enterprises (SMEs),and expansion of energy supply and telecommunications networks.

About half of this funding is directed into road and rail schemes and air transport. The main aim is to link the Central and Eastern European countries more effectively into Europe's internal market, thereby fostering these countries participation in labour sharing in Europe, helping to narrow the gap in the level of economic development and bring them closer to EU accession. Consequently the major transport corridors which already cross the EU are to be extended eastwards, thereby forming transcontinental transport corridors.

For example from Berlin a major transport route will link up with Helsinki via Warsaw and the Baltic States. Another will run from Berlin through Dresden-Prague-Bratislava and across the Balkans to Istanbul. Berlin will also be connected to Kiev via Wroclaw, Katowice and Lvov.

New roads are viewed as a crucial element, although efforts are also being made to move more freight by rail. The EU is currently considering how transport pricing should be adjusted, to strengthen incentives for transporting freight by rail both on environmental grounds and in response to the sustained trend towards high energy costs.

The EIB is helping finance virtually all the road sections currently under construction, as is also the case with regard to expansion of trans-European Networks (TENs) within existing EU borders.

The basic strategy was agreed in 1994 at the Essen European Council, when the decision was made regarding priorities in the building TENs for transport, energy and telecommunications, and to extend them to regions bordering the EU, particularly the candidate countries.

Since that time the EIB alone has approved loans totalling Eu65 billion for TENs projects, including important EU projects such as the Oresund fixed link, Athens Airport and the London-Channel Tunnel high speed rail link. These were all examples of PPPs.

There have also been substantial conventional loan financings across Eastern Europe.

In early November the EIB announced five loans totalling Eu397 million for national and urban transport projects in Romania. The biggest loan comprised Eu245 million, to the National Administration of Roads (NAR) for the rehabilitation of key transit roads, including the important domestic corridor linking Cluj Napoca in Transylvania with Suceava in the Moldavia region.

Another Eu115 million went to the Bucharest Metro, METROREX, to finance the modernisation of 60 metro trains, and complete the construction of the 4.8km metro line in southern Bucharest.

And in July 2000 the EIB granted a loan of Eu100 million towards the financing of two sections of the Orizovo to Burgas Motorway in Bulgaria, with the loan extended to the Bulgarian Ministry of Regional Development and Public Works.

The project involves a total of 75km of the Trakia motorway from the capital city Sofia to the port of Burgas on the Black Sea, which forms part of the main Bulgarian east-west road axis. This is part of the so called Priority Corridor VIII of the pan-European Road Network for Central and Eastern Europe. It is also a major priority for the development of the road sector at national level, as it will link Sofia and the three other major Bulgarian cities, Plodviv, Burgas and indirectly Varna. The project is designed to improve traffic conditions, and to reduce the negative impacts of congestion and pollution caused by through-traffic in many urban centres.

Meanwhile other infrastructure projects ranging from water services to gas pipelines are also benefiting from heavy EIB involvement. In October 2000 the EIB signed a Eu100 million loan to the Hungarian oil and gas company Magyar Olaj (MOL) to upgrade its production facilities, storage sites and pipelines across the country. This was the second EIB loan made to MOL, and the EIB has extended this financing in order to support an important private sector company during a crucial period of its development.

And in June 2000 the EIB made a Eu20 million loan to the City of Torun in north-west Poland to help upgrade drinking water and wastewater networks. And earlier in the year the EIB made another Eu20 million loan to help upgrade sewage and wastewater treatment plants in Zywiec in southern Poland, on the Czech and Slovak border.

Even more significant was a deal signed in Bulgaria in October 2000, which was the first major water concession to be tendered on a project finance basis in Central and Eastern Europe.

The background to the deal is the ongoing water privatisation program being pursued by the municipality of Sofia, which needed legislative changes in order to proceed. As part of a tender process a 49% stake was put up for sale in ViK, Sofia's municipal water supply and sewage system. This was won by Sofijska Vada AD ? a special purpose company owned by United Holdings plc, Bechtel Enterprises and Edison Spa. The EBRD acted as lead arranger on the project financing, and has initially put in place a $35 million term loan, which will help bring sewerage services in Sofia up to EU standards.

The EBRD is active across the region, and will also take equity stakes in projects, something which the EIB does not generally do. For example the EBRD has been getting involved in investments such as hotels, as part of basic infrastructure development in cities which need to cater to business travellers. Last year Raiffeisen Zentralbank Osterreich (RZB) got involved in a Eu38 million deal in Kiev, together with the EBRD, with RZB providing senior debt and the EBRD providing both debt and equity. The hotel will be operated by SAS Radisson, which is providing equity plus some guarantees, and will be aimed at business travellers.

?We are the B lender, and many of these deals tend to be of a size where we can do it alone together with the EBRD,? says Marc Faller, head of international project finance at Raiffeisen Zentralbank Osterreich (RZB) in Vienna. ?The split between debt and equity is 50:50 so it is not highly leveraged,? he adds, with hotels typically getting done with a minimum of 30% equity.

?We have a close relationship with the EBRD, especially with the property and tourism department, and we tend to do deals in more difficult countries,? says Faller. ?The EBRD is not needed so much now in countries such as Hungary and Poland,? he says, and RZB also tends to do business in countries where margins on loans are better. ?Our focus is on the more difficult countries. Ten years ago we were in Hungary and Poland, now we are doing more in the Ukraine,? he says.

Clearly the Central and Eastern Europe region has seen varying levels of economic development since the fall of communism, and in countries such as Poland and Hungary the private sector can now be relied upon for most projects. These two countries are expected to be in the first wave of entrants to the enlarged EU, together with the Czech Republic, Estonia, and Slovenia.