COMMENTARY: Infrastructure Building Blocs: ‘A Step Change’ by Dan Dimancescu (May 10, 2006)
At a conference of ’emerging’ region equity investors in New York recently, attention focused on East Europe. Someone asked and ‘What’s New in Romania?’ The answer from me was ‘A lot.’ But in the answer is at least one potential ‘step-change’ in Romanian economic and social life. The catalytic building bloc is the long overdue commitment to create a modern divided highway network. It remains enigmatic that highways were not a priority sooner in Romania’s sixteen years of post-revolution re-emergence.
But before commenting on the impact highways might induce, there’s a context of prior ‘infrastructure’ building bloc events. Of these the most important has been the nearly complete privatization of Romania’s banking system. The purchase by leading private foreign financial entities of Romania’s banks has brought the country into the global mainstream. The anecdotal evidence is in the ubiquity of ATMs and the growing ease of making seamless transactions electronically (all of which has not yet alleviated a heavy government-required reporting paperwork burden). A parallel event has been the rapid propagation of cellular communication rendering the old fixed line system obsolete though still necessary. The big players: Vodafone, Orange, Zapp all offer state-of-the-art services. These, though expensive given local incomes, are used extensively. The benefits far exceed the costs.
There’s another category of infrastructure events which relies more on cement, steel, and heavy machines: highways. The moving of goods and people is so fundamental to an economy that it is hard to believe that a country as large as Romania still has only 200 miles of divided highway (out of 8,500 miles of national main roads). The cost of such a shortcoming is not hard to compute even anecdoctally: slow trucks, wasted fuel, slower delivery times, environmental damage from clogged roads, greater rates of accidents, lost sales to more competitive regions.
The converse is equally dramatic. The benefits of a modern highway system (as well as rail) are enormous: faster delivery, connections to larger markets, fuel efficiency, stimulus to local business growth, greater travel safety. The collective effect will be no less than a step change in economic and social behavior. Hence the looming importance of $13 billion in construction projects including two declared major highway projects on the books.
One is the Bors-Brasov highways leading northward from Brasov into Transylvania and on to the Hungarian border. Also known as the Bechtel Highway it was a result of a controversial and very favorable contract to the contractor worth 2-3 billion euros. That contract was renegotiated by the current government on terms more favorable to Romania and less open-ended on add-ons.
The second project is the Pan-European Corridor IV. [See Europe Corridors Map) Long on the books as a projected route, this EU financed project will link the port of Constanta on the Black Sea to Arad on the western border with Hungary – and thus tie into the European highway network through Hungary into Austria and Germany. Another arm of this route will go from Arad to Craiova and across the Danube into Bulgaria and Sofia. This will make Istanbul more accessible. A new bridge is already under construction.
Both these projects will change the economic and social landscape for better and for worse. The worse will be in homogenizing the landscape. One is hard put even on the short stretches of Romania’s present-day highways to know whether one is in Kansas (USA) or between two cities in Italy. It all looks the same. So do the now ubiquitous gas stations and 24/7 stores. They are clean, efficient, and useful but have no identity other than that of a industrial logo and the goods they sell are increasingly industrial-neutered with fancy packages. The good news is in the economic pay-off. Local businesses can grow around greater ease of delivering goods, transportation businesses develop, real estate deals are made in proximity to good road networks, access to more distant markets is increased. And socially, these roads create a new kinds of mobility that allows people to enjoy more diverse destinations, to consider changing jobs more easily, and to travel abroad with greater ease. And of course any business related to cars is stimulated through increased sales of cars and trucks, spare parts, fuel and so on (never mind that this comes at a time of oil and gas shortages).
Highways – regretably – are a necessary evil. Without them no modern economy can thrive. With them one pays an enornous price environmentally to say the least. But without question, the effects they will induce in Romania will be nothing short of a step change.
IN THE NEWS: Government Highway Plans Bucharest Daily News (May 15, 2006)
Current road infrastructure projects add up to 10.38 billion euros and target construction of new highways and road rehabilitation. Foreign companies win most tenders but generally hire Romanian subcontractors.
Delegate Minister of Public Works Laszlo Borbely believes works on the Transylvania Highway will start “as soon as possible” as the contractor’s accounts have been debited significant amounts. Bechtel will have to call back workers and resume construction according to plans, starting near Campia Turzii towards Cluj and from Bors to Salaj. “We now have 80 million euros and about 100 million dollars and the memorandum closed in February stipulates we could go up to as much as 260 million euros,” Borbely said. In April, Borbely mentioned the Ministry of Finance had signed a credit contract with two international banks for a 100 million euro financing for payments to Bechtel. Works on the Transilvania Highway began in 2004 in a 2.2 billion euro deal and are expected to be completed in 2012. The current government supports the idea of beginning a new highway project, on the Bucharest- Pitesti- Ramnicu Valcea- Sibiu- Lugoj- Arad- Timisoara roadway, corresponding to European corridor IV.
The Ministry of Transportation has estimated current modernization, rehabilitation and development of road infrastructure projects at 10.38 billion euros. The state budget provides 2.3 billion euros in financing for projects such as the reduction of traffic on National Road 1 (DN 1) and on the Bucharest city ring, the construction of bridges over railroad tracks and extending and supplementing of lanes. A 22 million euro project targets the construction of a railroad passage at Otopeni and 20 million euros have been invested in increasing traffic capacity on the Ploiesti city ring.
For the construction plan of the 173.3-kilometer Bucuresti-Brasov Highway 1.8 billion euros have been allocated. The financing will go to the update of the feasibility study, bureaucratic procedures and the task book, the purchase of land where the highway is planned to be built, bidding documentation, consultancy and the execution of some works on the Bucharest-Ploiesti segment.
As for road repair projects, 3.71 billion euros have been allocated from the state budget. One of the projects is the repair work on the Bucuresti-Pitesti Highway, costing 45 million euros for 35 kilometers of road rehabilitation.
The consolidation of a 141 kilometer segment of national road Buzau-Brasov (98 million euros), the building of a bridge over the Doamnei River at Mioveni (4.43 million) and the rehabilitation of 52 kilometers of the road from Bucharest to Ploiesti are among the projects which have been financed from the state budget.
Projects to begin in 2006 include the completion of the Bucharest city ring and the development of the Timisoara, Oradea and Suceava rings.
Currently, external financing accounts for 2.08 billion euros of the total investment in road infrastructure. Easing up traffic on DN 1, extending the Otopeni passage to six lanes, the construction of the overpass insuring access to the Otopeni airport and the neighboring area and the rehabilitation of the Timisoara -Lugoj road are among the projects financed by international financial institutions.
External financing of highway construction projects adds up to one billion euros.
For the drafting of the feasibility study on the Arad- Timisoara Highway and the 49-kilometer detour at Arad 270 million euros have been allocated. The Cernavoda- Constanta highway obtained 354.6 million euros for planning and construction works.
The European Instrument for Structural Policies for Pre-Accession program requires total funds of 808 million euros. ISPA projects target road rehabilitation and the construction of sectors of the Bucuresti- Constanta Highway.
Construction companies that receive road infrastructure projects are making a mint in Romania, writes Gandul daily. Most biddings organized by the Romanian National Company of Motorways and National Roads (CNADNR) are won by foreign companies, which later hire Romanian subcontractors. Local companies rarely win biddings as task books provide that the winning company should have executed works in several countries, a requirement few Romanian companies fulfill. Moreover, according to CNADNR representatives, Romanian companies “are not solvable, have debts to the state or do not have a sufficient turnover.”