The EU might seem too preoccupied with internal fiscal difficulties to think about enlargement at the moment. But for the companies that based their strategies around further European integration, building genuinely close ties between the markets of new and aspiring EU states - mainly in the Balkans region - and those of the core western European economies remains a priority.
Developing the infrastructure to support integrated markets, especially in transport, is a key part of this. And since the companies that have bet on increasing economic ties include several of Europe's leading banking groups, it is little wonder that they have continued to invest time and money into promoting infrastructure finance in the central and eastern Europe (CEE) region.
"We like to see things happening for the local economies. Transport links such as motorways clearly lead to economic growth stimulus, potential new businesses such as logistics centres, more and easier trade connections, or more tourism if you establish an airport," says Werner Weihs-Raabl, head of infrastructure finance at Austria's Erste Group Bank.
The right fit
In May 2010, Erste signed a financing deal for €19m to more than double the capacity of an international standard airport at the Croatian tourist resort of Dubrovnik. Mr Weihs-Raabl believes this can extend the tourist season by making short stays more feasible. The transaction also suits Erste's profile in the region. As a specialist small and medium-sized enterprise (SME) lender that can work through local subsidiaries in many countries, writing smaller tickets still makes economic sense for the bank, and it is well positioned to benefit from growth among local companies rather than relying on multinational clients.
The deal also embodies the new financing environment in general, not only because of its smaller size. Erste is financing the municipal airport authority directly as the project sponsor, and the authority in turn will contract the construction. This avoids the bank taking on direct project delivery risk or complex structuring of the package via construction or operating concession companies.
"If we had gone through a public-private partnership (PPP) structure, there could have been two years of discussions about contracts, licensing and so on. The authority's priority was to build and open this airport as fast as possible, and the deal was not of such a large size that would make a PPP essential for the municipality to afford it," says Mr Weihs-Rabbl.
This does not mean that PPPs or larger projects are no longer possible. But the higher cost and greater scarcity of bank liquidity, together with the exit of certain banks from international project finance - most notably Royal Bank of Scotland, which had been the largest project finance lender worldwide - means adjusting the strategy needed for a successful transaction.
European Investment Bank loans signed in the western Balkans - €m
The rough and the smooth
The contrasting fortunes of motorway projects in Hungary and Slovakia on the one hand, and Poland and Romania on the other, provide a salutary lesson in what works - and what does not. Hungary's M6 was concessioned in two tranches totalling 120 kilometres from Budapest to the Croatian border, and took just 20 months from financial close to the opening of the road itself. Slovakia's R1 expressway raised more than €1bn in debt financing in August 2009, when market conditions were only just beginning to improve.
By contrast, the A3 project in Romania stalled at the tender phase after 18 months of pre-project preparation, because banks felt expropriation rules within the concession structure were unrealistic. And an attempted tender of the A1 in Poland faltered as the financial crisis set in, partly because financing banks were unwilling to take on the risk of traffic volumes underperforming on the toll road concession. All post-crisis road deals in the CEE region have been based on road availability payments - received for construction of the project and for maintaining the road and keeping it open for traffic access - rather than having to rely on the collection of traffic tolls.
"Germany has been able to close projects with traffic risk since the crisis period, but these were on A-model roads, where they were already tolling existing heavy-goods vehicle traffic. So they had about three or four years' data on the traffic, which means the existing level of traffic today is proven, and it is just a question of what participants expected the growth rates to look like," says Gavin Munro, managing director of project finance at Société Générale Corporate & Investment Banking (SGCIB) in London.
Equally, according to Mr Weihs-Rabbl, the experience of the Hungarian authorities and the two-tranche structure of the deal helped to ensure its success - alongside a relatively simple topography for the construction work. By splitting the project between two consortia, each was able to assemble a club deal for financing. This might not have been possible with a single large concession, because the four to six participants in the club would each have needed significant capacity to take down relatively large slices of the deal.
"There was a public-sector counterparty who understood that the mega-deals of the past are not possible, and who had a realistic approach to risk-sharing with no demands that were unusual or renegotiated at a late stage," he says.
Mr Munro agrees that there is a maximum capacity per project in the CEE market now, probably about €1bn. He adds that, while developed markets such as the UK have restored funding in the long-term segment (27 to 30 years), this is still not possible for CEE projects.
"Typically, we are still seeing giant club deals with individual exposures of about €100m; the syndication market is definitely not back yet. What we see in CEE is hybrids between mini-perms [short- to medium-term loans on which all or the bulk of principal is repaid at maturity] and longer maturity fully amortising structures with cash sweeps kicking in if they are not refinanced - the so-called 'soft' mini-perm," says Mr Munro.
Hayrettin Kaplan, President, Black Sea Trade and Development Bank
Multilateral support
The other notable feature of the R1, along with many other recent projects, was the dominant role of multilateral financing. Institutions including the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) have stepped in to fill the gaps in long-term funding left by departing commercial banks.
The EBRD received a 50% capital increase at its annual meeting in May 2010, and the EIB, which traditionally focuses on EU member states, has been increasing its attention on the applicant countries in the Balkans. Bankers say two EIB facilities have been especially helpful. One helps take on the cost of pre-project feasibility studies (which can be money wasted for commercial lenders if the project does not proceed). The other is the Loan Guarantee Instrument for Trans-European Transport Network projects (LGTT). This €1bn facility can assist up to €20bn in eligible projects, by providing 10% liquidity coverage (or 20% in exceptional cases) in case key variables such as traffic volumes underperform.
In December 2009, the EIB and EBRD also agreed the creation of the joint Western Balkans Investment Framework (WBIF) to coordinate their efforts in the region. Dario Scannapieco, the EIB vice-president for the western Balkans, says the WBIF is split between a general joint-lending facility of €1bn, and a technical assistance fund specifically intended for the preparation phase of major projects, such as conducting environmental impact studies.
Romualdo Massa Bernucci, director for the Adriatic region, says through its facilities for financing the SME portfolios of local commercial banks, the EIB is gradually building a network of ties that could help it generate more private funding for larger infrastructure projects.
"In Croatia, we are co-financing road rehabilitation with local banks, and there are other possibilities in the future for commercial banks to invest more in the region. But for now, the main part of the WBIF infrastructure plan is funding by multilateral financial institutions," says Mr Bernucci.
In fact, the renewed pressures in capital markets resulting from sovereign debt fears in the first half of 2010 have forced even some of the smaller multilaterals active in the region to constrain the scope of their projects. Greece is a 16.5% shareholder in the Black Sea Trade and Development Bank (BSTDB), which is rated Baa1 by Moody's, and Hayrettin Kaplan, the bank's president, says its funding costs have begun to rise as a result.
"We have maintained our investment grade ratings and our portfolio size, and we have no new non-performing loans, but it is unrealistic to think that we can play like the giant AAA rated multilaterals," says Mr Kaplan. Instead, the bank has accorded observer status to higher-rated development institutions such as the International Finance Corporation and Nordic Investment Bank, which are channelling their cheaper funds into the region using BSTDB's local expertise to co-finance projects.
