*Crisis leads to fewer but bigger projects
* States battle to avoid costs of investment
* Companies see opportunities in well-structured projects
By Greg Roumeliotis, European Infrastructure Correspondent
AMSTERDAM, Oct 6 (Reuters) - With strained public coffers
and a tough financing environment, Eastern European governments
are seeking fewer but larger, more high-profile infrastructure
projects that can attract EU funding and multilateral lenders.
The stakes for these countries are high, as the response to
their extensive infrastructure needs is being closely watched
not just by their domestic populations and bond investors, but
also by builders suffering from the real estate downturn.
The World Bank warned this month that Central and Eastern
European governments face tough spending choices, with their
deficits this year reaching, on average, 5.5 percent of GDP.
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Weary of burdening their already stretched balance sheets
and weakening their credit rating in what is a crowded market
for sovereign debt, countries such as Slovakia, Poland and the
Czech Republic are prioritising bankable projects than can
attract investment through public-private partnerships (PPPs).
Yet with the activity of commercial banks in the region
becoming increasingly selective, this strategy is firmly tied to
the financing capacity of the European Investment Bank (EIB),
the European Development Bank of Reconstruction and Development
(EBRD), the International Finance Corporation (IFC) and other
developmental financial institutions.
"The time of easy cheap credit is over," says Thomas Maier,
the EBRD's business group director for infrastructure.
"(Commercial) Banks are coming back to the region but with
strict smaller ticket sizes and strict country limits."
Cities and regions are particularly exposed to the shortage
in commercial lending as they lack the resources and expertise
of governments to procure PPPs and court multilaterals, although
the EIB has launched a drive to engage them.
The financing downturn is forcing the public sector to think
about which infrastructure projects are necessary and
sustainable, says Pierre-Alain Schieb, a director at the
Organisation for Economic Co-operation and Development (OECD).
"You cannot escape the fact that not all projects are
bankable," says Schieb.
BIAS TOWARDS BIG
In spite of the apparent financing hurdles, many countries
are eyeing big projects as they know EU development programmes
and international institutions are likely to support them more
than small projects.
The EU has allocated 348 billion euros in so-called
Structural and Cohesion funds for the period 2007 to 2013, and
is prepared to contribute up to 85 percent of the costs of the
project.
However, this means Eastern European governments must still
make up the difference.
As a result, the only way many Eastern European governments
can absorb, or obtain, the EU funds is if they attract private
capital through PPPs, says Christian Schnell, a procurement
expert at the Warsaw office of law firm BSJP.
"Poland for example has to absorb 67 billion euros in the
2007-2013 period and there is no way they can co-finance this
without PPPs," says Schnell.
In addition, there is special EU funding for projects that
qualify as Trans-European Networks (TEN) -- major schemes in
infrastructure and energy that also help attract EIB
participation.
Non-EU Eastern European countries face an even tougher
challenge as they rely even more on multilaterals to see big
projects through, says Angelo Dell'Atti, the IFC's general
manager for infrastructure advisory in Southeast Europe.
"Some governments are relaxing procurements rules and taking
rationing decisions quickly," Dell'Atti says. "Unfortunately
there is no magic wand."
PPP PROSPECTS
Major European construction firms that are heavily invested
in Eastern Europe are turning to the public sector in response
to a challenging real estate market, and are focusing on the
high-margin facility management sector that comes with PPPs.
PPP projects include a long-term facility management
contract that can provide the construction company with steady
cash flows over a long period of time, sometimes more than 30
years.
For this reason companies heavily invested in the region,
such as Austria's Strabag <STRV.VI>, which has some 4 billion
euros in output per year in emerging Europe, see the lack of
bank financing as the main obstacle to growth, rather than poor
demand for projects. []
Although PPPs offer a way for cash-strapped governments to
attract private investment in infrastructure, companies and
banks are requesting increasingly favourable terms that can
potentially burden the balance sheet of the state involved.
When Poland reached financial close in June on the 1.6
billion euro A2 motorway betwen Nowy Tomysl and Swiecko with a
Strabag-led consortium, it guaranteed the debt of the banks in
the case of default, essentially throwing its A- credit rating
behind the project.
Although structuring the deal as sovereign allowed the EIB
to go beyond its 50 percent participation limit for projects and
lend 1 billion euros to the scheme, this could be problematic
for Poland if the EU decides it must include the liabilities on
its balance sheet.
The EU's statistical agency, Eurostat, has yet to adjudicate
on the issue but market experts say it is unlikely to burden
Poland's finances with the project in the current economic
environment. This could set a precedent for other countries to
also underpin projects.
On the other hand, Slovakia closed a 1.13 billion euro R1
motorway contract in August with a consortium led by
France-based Vinci <SGEF.PA> without the absolute debt guarantee
provided by Poland, but only after an arduous six-month process
that involved two amendment agreements.
"Everybody is rushing to close as many PPP projects as
possible before the EU changes the accounting rules, as
expected, in 2013," BSJP's Schnell says, referring to an
expected review of accounting standards by the EU.
(Editing by Simon Jessop)
