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The New Europe: Transport

By Volker Ahlemeyer

Rail station

For decades the people of central and eastern Europe had been confined behind the Iron Curtain. Freedom of travel was among the first tangible results of the end of communist rule, and millions of people took to it with relish. However, the rapid increase in East-West travel soon showed that restrictions on movement were not only political – the transport infrastructure was also dilapidated, inadequate or simply non-existent.

“Reforming the transport sector was immediately identified as a basic requirement for the development of well-functioning market economies in the region,” says Thomas Maier, EBRD Managing Director for Infrastructure. “There was a huge need for restructuring. For us, it meant that the EBRD had to start from scratch and combine investment with policy dialogue and regulatory advice.”

Fostering reforms

The legacy of the command economy was omnipresent. The state was the owner of all transport-related infrastructure and the provider of all services, explains Sue Barrett, EBRD Director for Transport. “The EBRD’s goal was to create an environment that was conducive to private sector participation – a complex task in a region where the state had taken all economic decisions for almost five decades.”

To fill the most urgent gaps, the EBRD initially provided sovereign loans. This helped to kick-start a vital policy dialogue between the Bank and local authorities, which resulted in the opening up of the sector to non-state entities.

In many cases, an important step was the creation of commercially viable state-owned enterprises, such as independent rail cargo entities. The EBRD played a role here by supporting the development of corporate governance, best practice and the ability to attract funding on commercial terms.

“These initial steps helped to create entry points and business opportunities for the private sector from the mid-nineties onwards,” says Barrett. “Once the restructuring efforts took hold, some ancillary activities, such as road maintenance, airport security services or train catering, could be outsourced. At a later stage, this also included the construction and management of infrastructure under public-private partnership (PPP) structures.”

For the EBRD, this led to increased private sector investments: while in the early 2000s, private and non-sovereign projects accounted for 10 per cent of the transport portfolio across the Bank’s entire region, in recent years the volume has grown to over 50 per cent.

Private sector opportunities

The Bank achieved this by promoting new financial products to boost privatisation in central Europe and the Baltic states. In particular, PPPs have become a flagship model to support large-scale investments and introduce private sector efficiency in the sector.

“Our goal to attract the private sector to transport projects has become even more important in the current financial environment where state financing is limited. PPPs have become a critical source of funding for large infrastructure projects, which help to make central European economies more competitive and boost business activity,” explains Ms Barrett.

In the Slovak Republic, the EBRD participated last year in the first infrastructure project bond issue in central Europe, which also was Europe’s largest uncovered infrastructure bond for 2013. The R1 motorway was constructed from 2009 to 2012, using commercial bank and EBRD financing under a PPP structure. The bond refinancing allowed the sponsors to tap the capital markets, while at the same time lowering financing costs both for themselves and the Slovak taxpayer.

While road investments have topped the list of EBRD investments in volume terms, the Bank has supported activities across the whole spectrum of transport in the region. For example, the EBRD helped modernise rail networks before the 2004 EU enlargement, although further potential remains for the involvement of private sector companies, especially in the freight sector.

That’s why the EBRD supported the partial privatisation of Polish rail freight provider PKP Cargo by acquiring a 5 per cent equity stake in an IPO last year, the first such transaction in the rail sector in central Europe and the EU.

In total, since the EBRD was established in 1991, it has financed 240 transport projects worth €10.9 billion in eastern Europe and the Baltic states. This includes 51 per cent of its transport-related business investments in road projects, 33 per cent in the rail network, 6 per cent in the aviation sector, 10 per cent in port infrastructure, shipping, intermodal and related financing.

Challenges ahead

“Transport needs have changed dramatically from the previous era, when central Europe and the Baltic states were largely insulated from the global economy,” explains Maier. “After modernising the physical infrastructure and attracting private businesses, one of our next key challenges will be to promote sustainable transport activities.”

This means combining economic growth with environmental concerns. Sustainable transport encompasses a broad range of issues: among them the promotion of low-carbon transport and energy efficiency in transport-related infrastructure, as the sector is estimated to account for up to a quarter of global CO2 emissions.

At the same time, access to transport also helps reduce inequality in opportunities and development for individuals and businesses. The goal is to address these needs safely, without compromising quality of life for future generations.

With progress in the development of transport systems, the EBRD started to widen its products beyond traditional areas. New projects included, for example, railway property development. In the Czech Republic, the Bank provided equity for a long-term concession to develop rail stations in the mid-2000s.

The EBRD also aims to improve intermodal services and logistics services. In Lithuania, the Bank invested in the container port terminal operator Klaipedos Smelte. New cranes and container handling equipment will help turn the port into a transhipment hub, which can efficiently move freight onto the road and rail network to transport it further afield.

“Transition is a long and winding road and we haven’t reached the end of our journey yet,” says Maier. “Through our work, we will continue to help people and businesses move across borders, help the transport sector to become even more efficient and build more competitive economies.”

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