Traffic jam
With countries such as Poland, Hungary, the Czech Republic and
Estonia probably only a few years away from accession to the
European Union, the task of improving infrastructure across central
and eastern Europe is an urgent one. To take just one example, the
expected boom in east-west trade within an enlarged EU is going to
put tremendous strain upon the road and rail freight networks, and
the financing requirements are formidable. And a variety of
programs involving modernising sewage and drinking water systems,
plus environmental tasks such as cleaning up old power stations,
are adding to the burden. Not surprisingly, given the state of
public finances in many central and eastern European countries,
there are attempts to bring private capital into the equation.
Water sector privatisations have been progressing well, though
things have been slower on the privatisation of railways. As for
the vast network of new motorways that are needed, efforts to bring
the private sector into play are in slow motion.
Because of this the A2 toll road in Poland has assumed great symbolic importance among project finance bankers. There are still expectations that it will close this year, but some bankers are adopting a let's wait and see attitude. And until the A2 financing gets done, they say it will be difficult to proceed with other road projects, since following the M1 setbacks in Hungary the market wants to see a toll road project successfully executed.
The financing process has undoubtedly moved forward this year, after the decision by the Polish government to grant sovereign guarantees to the A2 project, which involves a 150km stretch of road costing Eu622 million, and which will form an important link in the Berlin to Warsaw highway. Bank lenders and bond investors are now more likely to step up with non-recourse debt, since a large slice of the project will now be financed by government guaranteed debt plus shareholder equity from sponsors Autostrada Wielkopolska SA.
?The law has been changed to allow more governmental financial support in the form of guarantees, and the toll road project is now less purely private sector,? says Michael Davies at law firm Allen & Overy in Warsaw, who thinks that guarantees will help this and other future projects move forward.
Without significant government guarantees bankers agree that the financing would have been a virtual non-starter, particularly after the previous debacle in Hungary, where a large syndicated loan raised with the help of the European Bank for Reconstruction and Development (EBRD) has had to be restructured.
The problem in Hungary was that a new road section was built near to existing roads, and that drivers have preferred to use the old and decrepit roads rather than pay the tolls for a less bumpy ride. The shortfall of toll revenues and debt restructuring have certainly not helped the image of central European toll roads among bank lenders and institutional fixed income investors.
?Hungary was a disaster,? one market observer comments. ?I have driven on the road, and after paying my toll I got out onto the motorway, and it was so empty that I felt as if I was financing the whole thing by myself.?
However bankers note that the Polish deal is slightly different, and that because they are upgrading an existing road it will not be so easy to bypass the toll road as is the case in Hungary.
Close of the financing, in the form of a syndicated loan plus a project bond, is still expected during 2000, though some observers have felt that the project bond idea, to be led by Deutsche Bank and Credit Lyonnais, is a bit optimistic, and that it would have been better to do the whole thing via the syndicated loan market.
However, Poland does have an investment grade sovereign rating of BBB-plus from Standard & Poor's, and any project bonds will benefit from the fact that the European investor base for bonds in the lower reaches of investment grade is growing. In fact a project bond for a coal fired power station in Poland is also currently in the pipeline, and may even hit the markets before Autostrada Wielkopolska.
Future Polish projects may also have the option of looking at an offering on the domestic bond markets, which would make sense since revenues are in zloty. Poland has the most developed debt capital markets of any of the former eastern bloc countries, and the authorities have been implementing legislation step by step designed to make it easier for securitisations and revenue bonds. The latest amended version of the Bond Act became law on 28 August.
?The new Bond Act for the first time introduces revenue bonds,? explains Piotr Kowalski, vice-president of the management board at the Central European Rating Agency (CERA) in Warsaw. ?These bonds can normally be issued by three types of entities, which are municipalities, entities where the municipality is a major shareholder, and a third category of private companies which are performing municipal tasks such as waste management, transportation etc.?
Kowalski explains that there is a specific provision saying that a joint stock company which has a concession for certain activities in the area of transportation and transportation infrastructure may issue revenue bonds. Autostrada Wielkopolska would have this option.
Certainly countries such as Poland and Hungary would like to see more private sector capital share the burden of their infrastructure requirements. Poland itself is suffering from a large current account deficit, and needs to reduce imports as well as attack its budget deficit. But as Maciej Reluga, economist at ING Barings in Warsaw points out, the upcoming schedule of presidential elections in November and parliamentary elections next year mean that politicians are doing little to cut spending.
?It is very difficult for the Ministry of Finance to convince the other ministries that expenditure should be cut back strongly,? Reluga says. ?The other ministries want to continue spending, and help gain some votes in the elections.?
For this reason private sector spending on infrastructure, such as the planned toll road loans and bond offering, would be very welcome at the Ministry of Finance in Poland, which is monitoring the deal closely.
But with accession to the European Union looming for the first wave of accession countries, the development of a good network of motorways for freight and passengers is viewed in Brussels as a crucial task, and one which cannot be left to the decisions of lenders and the private sector.
Much of the activity in central and eastern Europe is being in some way supported by the European Investment Bank (EIB), the loan finance arm of the EU. ?In the application countries, the EIB has done more road financing than the World Bank and the EBRD put together,? says an EIB spokesman in Luxembourg.
Since 1990 the EIB has deployed more than Eu11 billion in central and eastern Europe, and about half of this funding is being directed into road and rail schemes and air transport, with the aim of linking these countries more effectively into Europe's internal market.
The strategy is that major transport corridors which already cross the EU will be extended eastwards, to form transcontinental transport corridors. One key link into the EU will be Berlin, and in May of this year the EIB opened a new office in that city, not only with the function of looking after financing operations in the former East Germany, but also to help act as a link between the EIB and the countries of central and eastern Europe.
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 via Wroclaw- Katowice-Lvov to Kiev. The EIB is helping to finance virtually all the sections currently under construction, as is also the case with regard to the expansion of the Trans-European Networks within the EU.
The most recent EIB road financing was signed in July when it granted a loan of Eu100 million to help finance two sections of the Orizovo to Burgas motorway in Bulgaria. The project involves a 75 km stretch of the Trakia motorway running from the capital city Sofia to Burgas, which is a Black Sea port. It forms part of the main east west axis in the Bulgarian road system, and is also a part of the Priority Corridor VIII of the Pan European Road Network for Central and Eastern Europe.
And the EIB is also active in the rail sector, as well as in metro systems in some cities. In February the EIB signed a Eu75 million loan to the City of Prague to help finance the first phase of a four kilometre extension to the C Line of the Prague Metro. This is the second EIB loan connected to this project, designed to help reduce road congestion in Prague, following a previous Eu50 million financing in 1999.
The European Bank for Reconstruction and Development (EBRD) has also stepped up with loans into the rail sector, including an Eu10 million financing signed late last year for a railway line and marshalling yard to service a new private logistics centre in Budapest. The borrower was the Republic of Hungary, with the project being implemented by the Hungarian Railways, MAV. Co-financing was also provided by the EU-Phare program and the Hungarian government.
The project is designed to supply a future private intermodal terminal and logistics centre with basic infrastructure, with the EBRD proceeds being used to finance the marshalling yard. The project will enable the current congested terminal run by MAV to be replaced by a modern, purpose built and privately controlled terminal and logistics centre, which will be capable of handling growing transport demand with western Europe.
The water sector is also receiving plenty of support from development banks, given the huge resources needed to modernise both sanitation systems and drinking water networks across the region. It is being helped by equity investments by prominent western European water companies, though development bank or ECA support is often involved as well.
Early this year Suez Lyonnais des Eaux obtained Eu42.5 million from the EBRD to help finance improvements to the Brno-Modrice waste water treatment plant in the Czech Republic. And in general bankers say that entities such as the EBRD or the IFC must get involved alongside the commercial banks if water projects are going to successfully attract financing in the region. As well as making loans, the EBRD has also taken small equity stakes in some projects, as was the case in Budapest with a waste water privatisation involving Berliner Wasser Betriebe together with Vivendi or France.
And Vivendi was also the successful bidder for the 25-year concession awarded this year by the Municipality of Bucharest in Romania, taking over water treatment and distribution for drinking and sanitation purposes from state owned RGAB.
The EBRD has also supported, via one of it's A/B Loan structures, the Maribor waste water project in Slovenia, whose sponsors include the Suez Lyonnais des Eaux group. The EBRD took Eu14.8 million of the loan on its own books, and sold the remainder on to HypoVereinsbank, Dexia and Raiffeisen Zentralbank of Austria.
Such heavy commitment from entities like the IFC, EBRD and EIB is moving infrastructure projects forward across the region. But without a lot more private sector investment progress is going to be slow.
Because of this the A2 toll road in Poland has assumed great symbolic importance among project finance bankers. There are still expectations that it will close this year, but some bankers are adopting a let's wait and see attitude. And until the A2 financing gets done, they say it will be difficult to proceed with other road projects, since following the M1 setbacks in Hungary the market wants to see a toll road project successfully executed.
The financing process has undoubtedly moved forward this year, after the decision by the Polish government to grant sovereign guarantees to the A2 project, which involves a 150km stretch of road costing Eu622 million, and which will form an important link in the Berlin to Warsaw highway. Bank lenders and bond investors are now more likely to step up with non-recourse debt, since a large slice of the project will now be financed by government guaranteed debt plus shareholder equity from sponsors Autostrada Wielkopolska SA.
?The law has been changed to allow more governmental financial support in the form of guarantees, and the toll road project is now less purely private sector,? says Michael Davies at law firm Allen & Overy in Warsaw, who thinks that guarantees will help this and other future projects move forward.
Without significant government guarantees bankers agree that the financing would have been a virtual non-starter, particularly after the previous debacle in Hungary, where a large syndicated loan raised with the help of the European Bank for Reconstruction and Development (EBRD) has had to be restructured.
The problem in Hungary was that a new road section was built near to existing roads, and that drivers have preferred to use the old and decrepit roads rather than pay the tolls for a less bumpy ride. The shortfall of toll revenues and debt restructuring have certainly not helped the image of central European toll roads among bank lenders and institutional fixed income investors.
?Hungary was a disaster,? one market observer comments. ?I have driven on the road, and after paying my toll I got out onto the motorway, and it was so empty that I felt as if I was financing the whole thing by myself.?
However bankers note that the Polish deal is slightly different, and that because they are upgrading an existing road it will not be so easy to bypass the toll road as is the case in Hungary.
Close of the financing, in the form of a syndicated loan plus a project bond, is still expected during 2000, though some observers have felt that the project bond idea, to be led by Deutsche Bank and Credit Lyonnais, is a bit optimistic, and that it would have been better to do the whole thing via the syndicated loan market.
However, Poland does have an investment grade sovereign rating of BBB-plus from Standard & Poor's, and any project bonds will benefit from the fact that the European investor base for bonds in the lower reaches of investment grade is growing. In fact a project bond for a coal fired power station in Poland is also currently in the pipeline, and may even hit the markets before Autostrada Wielkopolska.
Future Polish projects may also have the option of looking at an offering on the domestic bond markets, which would make sense since revenues are in zloty. Poland has the most developed debt capital markets of any of the former eastern bloc countries, and the authorities have been implementing legislation step by step designed to make it easier for securitisations and revenue bonds. The latest amended version of the Bond Act became law on 28 August.
?The new Bond Act for the first time introduces revenue bonds,? explains Piotr Kowalski, vice-president of the management board at the Central European Rating Agency (CERA) in Warsaw. ?These bonds can normally be issued by three types of entities, which are municipalities, entities where the municipality is a major shareholder, and a third category of private companies which are performing municipal tasks such as waste management, transportation etc.?
Kowalski explains that there is a specific provision saying that a joint stock company which has a concession for certain activities in the area of transportation and transportation infrastructure may issue revenue bonds. Autostrada Wielkopolska would have this option.
Certainly countries such as Poland and Hungary would like to see more private sector capital share the burden of their infrastructure requirements. Poland itself is suffering from a large current account deficit, and needs to reduce imports as well as attack its budget deficit. But as Maciej Reluga, economist at ING Barings in Warsaw points out, the upcoming schedule of presidential elections in November and parliamentary elections next year mean that politicians are doing little to cut spending.
?It is very difficult for the Ministry of Finance to convince the other ministries that expenditure should be cut back strongly,? Reluga says. ?The other ministries want to continue spending, and help gain some votes in the elections.?
For this reason private sector spending on infrastructure, such as the planned toll road loans and bond offering, would be very welcome at the Ministry of Finance in Poland, which is monitoring the deal closely.
But with accession to the European Union looming for the first wave of accession countries, the development of a good network of motorways for freight and passengers is viewed in Brussels as a crucial task, and one which cannot be left to the decisions of lenders and the private sector.
Much of the activity in central and eastern Europe is being in some way supported by the European Investment Bank (EIB), the loan finance arm of the EU. ?In the application countries, the EIB has done more road financing than the World Bank and the EBRD put together,? says an EIB spokesman in Luxembourg.
Since 1990 the EIB has deployed more than Eu11 billion in central and eastern Europe, and about half of this funding is being directed into road and rail schemes and air transport, with the aim of linking these countries more effectively into Europe's internal market.
The strategy is that major transport corridors which already cross the EU will be extended eastwards, to form transcontinental transport corridors. One key link into the EU will be Berlin, and in May of this year the EIB opened a new office in that city, not only with the function of looking after financing operations in the former East Germany, but also to help act as a link between the EIB and the countries of central and eastern Europe.
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 via Wroclaw- Katowice-Lvov to Kiev. The EIB is helping to finance virtually all the sections currently under construction, as is also the case with regard to the expansion of the Trans-European Networks within the EU.
The most recent EIB road financing was signed in July when it granted a loan of Eu100 million to help finance two sections of the Orizovo to Burgas motorway in Bulgaria. The project involves a 75 km stretch of the Trakia motorway running from the capital city Sofia to Burgas, which is a Black Sea port. It forms part of the main east west axis in the Bulgarian road system, and is also a part of the Priority Corridor VIII of the Pan European Road Network for Central and Eastern Europe.
And the EIB is also active in the rail sector, as well as in metro systems in some cities. In February the EIB signed a Eu75 million loan to the City of Prague to help finance the first phase of a four kilometre extension to the C Line of the Prague Metro. This is the second EIB loan connected to this project, designed to help reduce road congestion in Prague, following a previous Eu50 million financing in 1999.
The European Bank for Reconstruction and Development (EBRD) has also stepped up with loans into the rail sector, including an Eu10 million financing signed late last year for a railway line and marshalling yard to service a new private logistics centre in Budapest. The borrower was the Republic of Hungary, with the project being implemented by the Hungarian Railways, MAV. Co-financing was also provided by the EU-Phare program and the Hungarian government.
The project is designed to supply a future private intermodal terminal and logistics centre with basic infrastructure, with the EBRD proceeds being used to finance the marshalling yard. The project will enable the current congested terminal run by MAV to be replaced by a modern, purpose built and privately controlled terminal and logistics centre, which will be capable of handling growing transport demand with western Europe.
The water sector is also receiving plenty of support from development banks, given the huge resources needed to modernise both sanitation systems and drinking water networks across the region. It is being helped by equity investments by prominent western European water companies, though development bank or ECA support is often involved as well.
Early this year Suez Lyonnais des Eaux obtained Eu42.5 million from the EBRD to help finance improvements to the Brno-Modrice waste water treatment plant in the Czech Republic. And in general bankers say that entities such as the EBRD or the IFC must get involved alongside the commercial banks if water projects are going to successfully attract financing in the region. As well as making loans, the EBRD has also taken small equity stakes in some projects, as was the case in Budapest with a waste water privatisation involving Berliner Wasser Betriebe together with Vivendi or France.
And Vivendi was also the successful bidder for the 25-year concession awarded this year by the Municipality of Bucharest in Romania, taking over water treatment and distribution for drinking and sanitation purposes from state owned RGAB.
The EBRD has also supported, via one of it's A/B Loan structures, the Maribor waste water project in Slovenia, whose sponsors include the Suez Lyonnais des Eaux group. The EBRD took Eu14.8 million of the loan on its own books, and sold the remainder on to HypoVereinsbank, Dexia and Raiffeisen Zentralbank of Austria.
Such heavy commitment from entities like the IFC, EBRD and EIB is moving infrastructure projects forward across the region. But without a lot more private sector investment progress is going to be slow.
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