The role of the public banks in financing motorways construction via the PPP scheme in the CEE The experience from Hungary Anelia Stefanova, CEE Bankwatch Network / Transport Coordinator OPEN DAYS October 10, 2006

The presentation overview 1.The PPP motorway market 2.The true driving forces behind PPP in the motorway sector 3.Threats to the public interest 4.Examples from the Hungarian PPP projects 5.Conclusions: Role of the public banks in PPP motorway projects

The IFIs interest in PPP – new big market 1990 – 2003 European Investment Bank (EIB) signed loans for EUR 15 billions aimed at supporting PPP projects – motorways and roads accounts for 39% 1990 – 2005 In the transition countries were funded/completed PPP infrastructure projects for more than EUR 112 billions – toll roads are 49% In Central Europe and Central Asia are relatively behind with the PPP – 55 projects for EUR 10 billions in the infrastructure sector

The booming motorways development in CEE – more opportunities for PPP TEN-T development in the new members states – more than EUR 100 billons for transport infrastructure by 2015 TEN-T extension to the neighbouring countries – more than EUR 35 billions by 2015 EU funds for the infrastructure development ( ) are quite limited - could be max 5-6 % from total transport investments planed. Most of the capital (80-90 %) comes from the lenders – banks, insurance companies.

Euro Zone accession prospects of CEE in 2004 StateOfficially set goal Fiscal deficit in percentage of GDP (ref. rate: 3 %)* Inflation rate % (ref. rate 2.4 %)** Comment Czech Republic Openly undertaken policy of wait and see Estonia Attainable owing to the strict budget policy Poland Doubts about feasibility (political instability) Hungary Serious doubts about feasibility Slovakia Speeding up after an approach of wait and see Slovenia Attainable owing to the disciplined economic policy Source: "Európai Tükör", December 2005, ECB (2004) p. 23 * EC prognosis for 2004 ** September 2003 – August 2004

The true driving forces behind PPP The ability to bypass expenditure controls To move public investment – and the associated debts – off individual governments balance sheets Corporate benefit from the public services – In most countries, the road network constitutes one of the largest community assets and is predominantly government-owned. Many road agencies have the responsibility to manage assets comparable in value to those of the largest private international firms - WB toolkit for PPPs in highways

Threats to the public interest Hidden privatisation Expensive motorways Disinvestments in the public services Advantages for the participation of major corporations based outside the countries where schemes are to be implemented

The reasons in CEE countries Lack of comprehensive transport policies Bad project assessment - no guarantee for protection of the community interests – value for money, environmental and social conditions Lack of transparency around PPP contracts Lack of mechanisms for public monitoring and control of concessions

The Hungarian motorway sector development in the last 15 years 1990 – 2005 Doubling of the motorways and express ways in the country – from 349 km to 780 km Hungary is the first country in CEE to undertake motorway construction through concession financing. Vignette system applies to total of 677 km of the Hungarian motorway network. Annual revenues from the vignette systems are around EUR 85 million that are not enough to cover the operational, maintenance and management costs of the motorway network managed by the State Motorway company (520 km)

The EBRD involvement in financing PPP motorways in Hungary 1993 the EBRD finance its first ever PPP motorway project – EUR 67 million for a private company to participate in M1-M15 Motorway, Hungary In 1995 the EBRD gave EUR 61 million to the concessionaire of M5 Motorway. In 2004 the Bank support the refinancing of the projects with EUR 167,5 millions In 2005 the EBRD financed with EUR 50 millions the realization of the M6 Motorway DBFO projects In 2004 the EBRD assessed that Hungary have low compliance with the internationally accepted standards on concession and especially regarding selection of the concessionaire

Results Inquiries made by Hungary's National Audit Office (NAO) showed that PPPs enabled the quick realisation of projects but in numerous cases they were neither cost-effective nor economical. M6 motorway: The net present value of the basic availability charge payable during 22 years is EUR 513 million (this means nearly EUR 10 million/km). M5 motorway: According to the revised 2004 contract - the construction of the 46 km long section between Kiskunfélegyháza and Szeged, and the maintenance of the entire 147 km-long road the Hungarian government will pay EUR 92.5 million annually from 2006 to Calculated at present value (EUR million), this amount is 2.3 times the original cost (EUR 365 million). The construction cost is EUR 8 million/km for 46 km section.

Conclusions: Role of the public banks in PPP motorway projects To do a due diligence of the Value for Money criteria To increase transparency and public control over PPP deals To provide technical assistance for assessment of the public needs in the transport sector To shift investments towards more sustainable transport modes

Thank you for your attention!!