Central and eastern European countries may need to rely on grant money as they try to reduce an infrastructure deficit of nearly half a trillion euros that is reducing competitiveness and growth across the region, according to James Stewart, chairman of the global infrastructure practice at consulting firm KPMG.
Many countries are still undergoing considerable fiscal consolidation, and their ability to raise finance or make capital investments is seriously limited. The alternative — funding investments by raising tolls and utility bills — is politically unpalatable in countries that have already suffered the social consequences of austerity. Utility bills were a direct flashpoint for protests in Bulgaria, which brought down the government in 2013.
“They are stuck,” Stewart said. “Unless an external agency is prepared to give them the money then there’s no magic bullet.”
The European Investment Bank puts the total spend needed to close CEE’s infrastructure gap at around €500bn. There is a divergence in spending between countries that have natural resources or significant current account balances, Stewart said. Emerging markets that have cash reserves, such as Brazil and China, are investing in their domestic infrastructure. Both have also invested in projects around the world, spending billions in Latin America, Africa and central Asia.
During a visit to Romania last year, Chinese premier Li Keqiang promised large investments into CEE infrastructure. Stewart is sceptical. “The Chinese government has been imaginative about how they are going to get paid, but they still get paid,” he said.
“They don’t go into a country for nothing. They go into a country because there are minerals or land that they want access to. Eastern Europe [is] less fortunate in not having those kind of resources.”
In the current environment, EU grants are the region’s best bet to finance its infrastructure, Stewart said. “That is the external resource that is available, and that’s what they have to make use of.”
Former EU trade commissioner Peter Mandelson said that if Europe genuinely wanted to deepen and broaden the single market and drive convergence among the continent’s developed and emerging economies, the EU would have to become a more proactive funder of infrastructure.
“The continent-wide authorities like the European Union and the [European] Commission have got to become much more than simply exalted cheerleaders and supplementary funders,” he said. “I think that the EU and the Commission have got to become much more of an agency in planning and organising and harnessing funds than they are at the moment.”
The private sector could also become more heavily involved in funding projects. While institutional investors have bought into infrastructure in developed markets, in emerging markets currency risk can negate the predictability of those returns. “Global investors are going to go into euro or sterling [projects] before they go into [emerging market currencies],” Stewart said.
The lack of “big ticket” projects is also hampering investment, said Peter Attard Montalto, emerging market economist at Nomura. A lot of the infrastructure demand is in rural areas and poorer regions where it is more difficult to make a commercial case, he said.
“There are parts of Romania that look like Africa — the classic donkeys on the road. Even in Poland there’s a bit of that. Are you really going to build infrastructure there, or are you going to concentrate on creating commercial hubs?”