## Executive Summary ## Source details **Canonical URL:** [Executive Summary](https://www.imf.org/-/media/files/publications/dp/2020/english/iceseebmipiea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2020/english/iceseebmipiea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2020/english/iceseebmipiea.pdf.json) --- ### Context and objectives - CESEE countries have made remarkable economic progress in the last 30 years and aspire to converge toward the EU15. - Infrastructure investment is a key priority to accelerate convergence and has gained prominence as a recovery tool in the context of the COVID-19 pandemic. - Paper objectives: - Benchmark physical infrastructure in CESEE versus the EU15. - Estimate the macroeconomic impact of public investment in the region, including coordinated cross-country investment. - Discuss how to make the most of such investment. ### Key findings on gaps and costs - CESEE’s per capita income stands at about 55 percent of the EU15 average; CESEE-EU economies’ income levels have reached about 70 percent of the EU15 level. - CESEE lags the EU15 in both quantity and quality of infrastructure. - Public capital stock as a share of output in CESEE is currently some 10 percentage points below the EU15 level. - Illustrative cost to close 50 percent of current gaps relative to the EU15 by 2030: between 3 percent and 8 percent of GDP annually. - An alternative econometric approach suggests total costs of about 5.5 percent of GDP for the current year. - Water and sanitation gaps smaller: share of population with access to basic water and sanitation services about 3–4 percentage points lower than EU15 average. - Key unit costs (inflation-adjusted, USD): - Electricity generation per kW: 2,970 - Roads per km: 608,794 - Railways per km: 1,336,378 - Airports per person: 8 - Fixed telephone line subscription: 861 - Mobile telephone subscription: 668 - Broadband internet subscription: 566 - Annex Table 1 (additional cost estimates based on current demand): - Total cost (billion USD): CESEE 90.5; CESEE-EU 15.8; Western Balkans 1 6.3; Other Large EMs 68.5 - % of GDP: CESEE 2.1; CESEE-EU 1.0; Western Balkans 1 3.4; Other Large EMs 2.7 - To satisfy EU15 GDP per capita level (Annex Table 1): - Total cost (billion USD): CESEE 111.0; CESEE-EU 19.3; Western Balkans 1 8.1; Other Large EMs 83.6 - % of GDP: CESEE 2.5; CESEE-EU 1.2; Western Balkans 1 4.4; Other Large EMs 3.3 - Stylized sectoral gaps (percent deviation from EU15 averages, 2018 or latest available): - Electricity generation capacity per 1 million people: CESEE on average about 50 percent less than EU15 (country variation: Moldova shortfall about 90 percent; Czech Republic shortfall about 10 percent). - Roads and railways (normalized for arable land area): on average some 60 percent (roads) and 40 percent (railways) below EU15. - Internet density, fixed line phone, mobile phone, air passengers: considerable cross-country variation; mobile phone density in CESEE close to EU15 levels. ### Macroeconomic impact: empirical magnitudes - Empirical and model-based multiplier estimates for public infrastructure investment in CESEE: - Short term: 0.5–0.8 (increase in output for a euro spent) - Long term: 1.7–2.5 - Implicit fiscal multiplier on impact from identified public investment booms: about 1.7 - Multipliers are larger during recessions and in countries with stronger infrastructure governance. - Public investment booms (normalized as a 1 percentage point increase in public investment as percent of GDP on impact): - An unanticipated unit increase during recessions raises output by about 2 percent; impact during expansions much smaller and statistically insignificant. - Output response larger when initial public capital stock is smaller and when infrastructure quality is better. ### Model simulations (GIMF) — scenarios and quantitative outcomes - Baseline calibration: - Elasticity of output with respect to public capital: 0.14. - Scenario: infrastructure investment above baseline by 1 percent of GDP for a period of 10 years. - Financing scenarios (CESEE-EUb example): - Debt-financing: - Higher infrastructure investment by 1 percent of GDP leads to higher real GDP by about ½ to 1 percent immediately and by 2 to 3 percent over a decade. - Public debt to GDP ratio peaks at about 5 to 6 percentage points above the baseline in 2030. - Consumption tax financing: - Long-term GDP and private investment similar to debt financing; short-term impact somewhat lower. - Consumption tax to GDP ratio rises to 1 percentage point above steady state over two years. - Lower public consumption financing: - Public consumption declines to 1 percentage point below steady state over 5 years. - Long-term activity impact comparable; public debt broadly stable. - Common long-term result: GDP would rise above steady-state value by about 2½ percent in all CESEE subregions. - Public investment efficiency calibration: - Baseline efficiency in CESEE: 85 percent (meaning 15 percent of funds are lost to inefficiencies). - Calibrations: large EMs and WB 82.5 percent; CESEE-EU 88.5 percent; Euro area 92 percent. - If public investment efficiency were higher by 10 percent, the 1 percent of GDP increase would raise GDP by a further ½ percent; private investment and consumption each rise by ≈¼ percent. - Coordination and connectivity: - Simulations: coordinated increase across CESEE subregions each spending 1 percent of GDP over 10 years; improved connectivity modeled as 5 percent gradual decline in non-tariff barriers over 10 years. - Coordinated investment plus improved connectivity yields the largest gains; coordinated investment without improved connectivity produces gains similar to single-region shock. - Cross-border projects can yield almost double the impact on trade relative to single-country implementation (calibration based on literature). - Selected model simulation entries (Real GDP percent difference, Individual Region Investment): - CESEE-AE: 2020 0.48; 2025 2.00; 2030 3.59; 2035 3.09 - CESEE-EU: 2020 0.69; 2025 1.73; 2030 2.57; 2035 2.34 - WB: 2020 0.73; 2025 1.81; 2030 2.82; 2035 2.70 - Large EMs: 2020 0.88; 2025 1.36; 2030 1.71; 2035 1.97 - Improved Connectivity (Real GDP percent difference, selected): - CESEE-AE: 2020 0.92; 2025 2.82; 2030 5.13; 2035 5.08 - CESEE-EU: 2020 0.81; 2025 2.05; 2030 3.09; 2035 2.98 - WB: 2020 1.10; 2025 2.96; 2030 4.54; 2035 4.74 - Monetary accommodation: - If policy rates remain accommodative, short-term output dividends about 2 to 3 percent of GDP; policy rates increase only by 0.4–0.6 percentage points over next 10 years in the accommodative scenario. - Monetary accommodation amplifies gains relative to active tightening; model entries show slightly larger Real GDP and Real investment outcomes under monetary accommodation. ### Cross-border investment and spillovers - Cross-border projects amplify benefits when they improve connectivity and lower trade costs. - Barriers and risks for cross-border projects: inconsistent regulatory frameworks, varied governance and creditworthiness, more complex procurement and approvals, cost- and risk-sharing challenges. - EU frameworks and financing (EFSI, InvestEU, Next Generation EU) play a significant coordinating and financing role for cross-border projects. ### Key challenges, risks, and caveats - Implementation delays and cost overruns common, reflecting weaker infrastructure governance. - Infrastructure projects generate fiscal risks and opportunities for corruption. - Project-level demand forecasts, risk quantification, and fiscal risk analysis are often weak or absent. - Cost estimates are illustrative: assume closing 50 percent of gap by 2030, equal weighting across sectors, identical unit costs across countries, and exclude environmental costs and opportunity cost of capital. - Pandemic effects: some projects postponed or cancelled; budgets stretched; uncertainty high; potential realization of contingent liabilities. ### Country and subgroup heterogeneity (selected) - Public capital stock per capita in CESEE about half of EU15; Western Balkans less than a third; CESEE-EU closest to EU15. - Western Balkans estimated needs about 7–12 percent of GDP per year to close 50 percent of gap relative to EU15. - CESEE-EU estimated total costs between 2–3 percent of GDP annually to close 50 percent of gap; completely closing gap by 2030 would raise CESEE-EU estimated total costs to 3½–6 percent of GDP annually. - Other Large EMs estimated total costs about 3–13 percent of GDP annually (land transport gaps large; Russia accounts for large share in monetary amounts). ### Infrastructure governance, PPPs, and risk management ### Public Investment Management (PIM) findings - PIM effectiveness weak relative to best practice across planning, appraisal, selection, multiyear budgeting, procurement, project implementation, and maintenance planning. - Common weaknesses: - Poor integration of national and sectoral strategies; weak linkage between planning and budgeting. - Inadequate costing and risk identification in project appraisal. - Large deviations between budget forecasts and execution; insufficient maintenance funding. - Multiple pipelines and weak cost-benefit analysis in project selection. - Weak portfolio and project implementation management; limited ex post audit of major projects. - PIMA coverage and notes: - Published PIMAs end-2019 for Estonia, Kosovo, the Slovak Republic, and Ukraine. - PIMAs undertaken but not published for Albania, Bosnia and Herzegovina, Bulgaria, Moldova, and Serbia. - Nine CESEE countries with PIMAs completed since 2016 show design typically better than effectiveness. ### Fiscal risks, SOEs, and contingent liabilities - SOEs own and operate a large share of region’s infrastructure; governance shortfalls contribute to soft budget constraints and fiscal risks. - Example: Belarus off-balance sheet support with quasi fiscal transfers amounting to 2 percent of GDP per year over 2014–19. - Survey and PIMA findings: - Risk coverage and monitoring, risk analysis, and management of financial risks are “not present” or “only somewhat present” in about half of CESEE countries. - Three of nine formal PIMAs found risks not systematically assessed as part of appraisal; mitigation plans prepared in only one country. - Contingent liabilities from subnational, public corporations, and PPPs often not systematically reported to central government. ### Private participation and PPPs - Private infrastructure finance in CESEE: stood at 0.9 percent of GDP at end-2019 and averaged 0.6 percent of GDP over the last decade. - PPPs amounted to about 0.5 percent of GDP per year on average in CESEE over the last decade; PPP prevalence greater in CESEE-non-EU, where PPPs have amounted to about a quarter of total public investment. - Global private infrastructure finance in 2019: USD229 billion; portion for CESEE in 2019: about USD10 billion. - PPP constraints in CESEE: - Weak PPP institutional and financing frameworks. - Project preparation and procurement shortcomings; unclear regulatory frameworks; revenue visibility issues. - Investors prefer brownfield projects; greenfield projects face higher construction and revenue risks. - Risk mitigation instruments and availability (summary): - Instruments include guarantees/insurance for political/regulatory and non-payment risks, FX guarantees and hedging, liquidity facilities, credit enhancements, grants, taxation incentives. - Providers: MDBs, DFIs, MIGA, ECAs, commercial banks, insurance companies, export credit agencies. - Limitations: limited project eligibility, MDB counter-indemnity requirements, limited tenor and size, limited availability of long-term debt finance, little differentiated prudential treatment for infrastructure for regulated investors. - IMF/World Bank tools: - PPP Fiscal Risk Assessment Module (PFRAM 2.0) released September 2019 to assess costs and risks of PPPs at project and portfolio levels. - IMF PIMA can help develop tailored action plans to strengthen PIM. ### Project finance and lender safeguards - Project finance features: unsecured lending to a standalone economic unit; repayment based on project cash flow; heavy asset intensity supports higher leverage. - Structural safeguards: turnkey construction contracts, liquidated damages, step-in regimes, senior secured security interests, pre-agreed inter-creditor arrangements, stress-scenario financial modeling, covenants and reserves for liquidity. - Asset recovery and creditor rights critical for project finance viability. ### Policy implications and recommendations ### Priorities to maximize benefits of infrastructure investment - Strengthen infrastructure governance across planning, allocation, and implementation stages: - Improve integration of national and sectoral strategies with budgeting. - Strengthen project appraisal, costing, risk identification and mitigation, and independent review. - Adopt standard and transparent project selection criteria and maintain a pipeline aligned with strategy. - Improve multi-year budgeting, maintenance funding, procurement practices, project implementation management, ex post audits, and asset monitoring. - Use IMF PIMA to develop country-specific action plans where needed. - Mobilize private finance while prudently managing public risk: - Enhance PPP frameworks, assess PPP fiscal risks using PFRAM, and improve government capacity for PPP design and contract management. - Widen risk mitigation instruments (targeted guarantees/insurance, liquidity facilities, credit enhancement) while accounting for fiscal contingent liabilities and moral hazard. - Attract domestic long-term institutional investors by reviewing investment regulations and improving transaction bankability. - Prioritize project selection and value for money: - Reprioritize investments toward digital and low-carbon, climate-resilient (LCCR) infrastructure. - Ensure bankable projects with optimal risk allocation and sound procurement. - Reassess project pipelines rapidly to identify implementable, high-impact projects given pandemic-era uncertainty. - Cross-border projects: - Pursue cross-border projects where clear payoffs exist for individual countries and where EU frameworks can provide transparency and coordination. - Ensure clear payoffs, adherence to international standards, and robust coordination and monitoring protocols. - Fiscal calibration and sustainability: - Appropriately calibrated infrastructure investment need not compromise fiscal or external sustainability. - Financing choices affect short-term macro aggregates and fiscal outlook materially; consumption tax or public consumption reallocation financing differ in short-term dynamics but produce similar long-term GDP gains. - Partial financing by external grants further improves outcomes. - Use recovery to accelerate green and digital transitions: - Avoid locking in carbon-intensive growth; CESEE average investment need for climate mitigation through 2030 estimated roughly 1.5 percent of GDP per year. - Make projects climate-smart through systematic appraisal of GHG impact, vulnerability, resilience scoring, and climate damage functions. ### Operational and institutional actions - Strengthen SOE governance: more independent/professional boards, stricter financial reporting and auditing, clearer fiscal links to central government budgets. - Improve fiscal risk transparency: systematic reporting of contingent liabilities, regular fiscal risk assessments covering PPPs, SOEs, guarantees; quantification of size and probability of risks. - Build capacity: enhance project preparation, procurement, market sounding, contract management, and monitoring skills in procuring agencies and Ministries of Finance. - Expand and coordinate risk mitigation offerings with careful fiscal safeguards: guarantee schemes, targeted grants, liquidity facilities, and credit enhancements where appropriate and fiscally manageable. - Prioritize readiness and absorptive capacity: ensure procurement systems, access to capital, labor and materials are adequate to implement scaled-up investment. *Executive Summary — INFRASTRUCTURE IN CENTRAL, EASTERN, AND SOUTHEASTERN EUROPE (Executive Summary, iceseebmipiea - Executive Summary)* ### Executive Summary ������������������������������������������������������������������������������������������������������ ### Executive Summary ### Context and objectives - CESEE countries have made remarkable economic progress in the last 30 years and aspire to converge toward the EU15. - Infrastructure investment is a key priority to accelerate convergence and has gained prominence as a recovery tool in the context of the COVID-19 pandemic. - This paper benchmarks physical infrastructure in CESEE versus the EU15; estimates the macroeconomic impact of public investment in the region, including coordinated cross-country investment; and discusses how to make the most of such investment. ### Benchmarking infrastructure: gaps and illustrative cost estimates - CESEE’s per capita income stands at about 55 percent of the EU15 average; CESEE-EU economies’ income levels have reached about 70 percent of the EU15 level. - Despite progress, CESEE lags the EU15 in both quantity and quality of infrastructure. - Public capital stock as a share of output in CESEE is currently some 10 percentage points below the EU15 level. - Illustrative cost estimate: closing 50 percent of the current gaps relative to the EU15 in terms of infrastructure quantity by 2030 could cost between 3 percent and 8 percent of GDP annually. - More investment would be required to make infrastructure investment climate-resilient and green. ### Macroeconomic impact: empirical findings and model results - Short-term fiscal multipliers for public infrastructure investment are estimated at 0.5–0.8 (increase in output for a euro spent). - Long-term multipliers are estimated at 1.7–2.5. - Multipliers are larger during recessions and in countries with stronger infrastructure governance. - Model simulations indicate that: - If the efficiency of public investment in CESEE rose to EU15 levels and coordinated investment improved connectivity, the long-term output dividend would almost double. - Appropriately calibrated infrastructure investment need not compromise fiscal or external sustainability. ### Key challenges and risks - Implementation delays and cost overruns are common manifestations of weaker infrastructure governance. - Infrastructure projects can generate fiscal risks and are prone to corruption opportunities. - Cross-border infrastructure projects offer amplified benefits but entail greater coordination challenges and additional risks (inconsistent regulatory frameworks, varied governance and creditworthiness). - The pandemic has adversely affected public investment, with some projects postponed or cancelled; budgets are stretched and uncertainty is high. ### Policy implications and recommendations - Strengthen infrastructure governance broadly, including for state-owned enterprises, to achieve more effective and integrated public investment and risk management. - Enhancing infrastructure governance is critical for attracting greater private sector participation and managing the higher stakes of public-private partnerships (PPPs). - Promote private participation while addressing the specific risk factors that deter private investors and deploying appropriate risk mitigation instruments. - Cross-border projects should be pursued where clear payoffs exist for individual countries and where EU frameworks can provide transparency and coordination. - Use the recovery from the pandemic as an opportunity to scale up digital and low-carbon, climate-resilient (LCCR) infrastructure while maintaining value for money. ### Overall conclusion - Scaling up and improving the efficiency of infrastructure investment can significantly boost CESEE output and accelerate convergence to EU15 living standards. - Success depends on better governance, careful fiscal calibration, mobilizing private finance with appropriate risk sharing, and improved cross-border coordination—especially to realize gains from connectivity and to support the green and digital transitions. *Executive Summary — INFRASTRUCTURE IN CENTRAL, EASTERN, AND SOUTHEASTERN EUROPE (Executive Summary, iceseebmipiea - Executive Summary)* ### 1. Real Public Capital Stock: CESEE ### 1. Real Public Capital Stock: CESEE ### Introduction and main findings - CESEE lags the EU15 in public capital and various measures of physical infrastructure, with significant cross-country variation. - Illustrative cost to close 50 percent of current physical infrastructure gaps with the EU15 by 2030: 3–8 percent of GDP annually—more to make the investment climate-resilient and green. - Estimated output multipliers (increase in output for a euro spent on infrastructure) in CESEE: - Short term: 0.5–0.8 - Long term: 1.7–2.5 - Multipliers are larger during recessions, implying infrastructure investment can support activity during the recovery from the pandemic. - Model-based simulations indicate greater output dividends: - In countries with better infrastructure governance. - For cross-border projects that improve connectivity and lower trade costs. - Properly calibrated infrastructure investment need not compromise fiscal and external sustainability. - Strengthening infrastructure governance—medium-term budgeting, project appraisal and selection, procurement, and project implementation management—can raise the benefits of infrastructure spending. - There are gaps in fiscal risk analysis and management in CESEE; an IMF Public Investment Management Assessment (PIMA) could help develop tailored action plans. - Raising private sector participation could increase efficiency and expand financing, but should be accompanied by stronger public investment and risk management (including PPPs). - The IMF–World Bank PPP Fiscal Risk Assessment Module (PFRAM 2.0) can help assess PPP design and long-term fiscal consequences. - Widening risk mitigation options for private investors and attracting domestic long-term institutional investors could be desirable, but may require reviewing investment regulations. ### Regional initiatives and EU investment plans - EFSI (Juncker Plan) initial investment target: at least €500 billion (about 3.5 percent of 2019 EU GDP). - In July 2020, approved EFSI financing generated €514 billion worth of investments; one-tenth of which in CESEE-EU. - InvestEU Program proposed to mobilize investments of at least €650 billion (about 4.5 percent of 2019 EU GDP) across four areas: sustainable infrastructure; research, innovation and digitalization; small- and medium-sized businesses; and social investment and skills. - Next Generation EU recovery package: - Total EU debt issuance: €750 billion, to be repaid over 30 years. - More than half (€390 billion) to be disbursed as grants over the next three years mostly through the Recovery and Resilience Facility (RRF); remainder as loans, top-ups of EU structural funds, and additional guarantees to the EIB Group. - Based on indicative allocation keys, CESEE-EU countries are likely to benefit up to €212 billion of grants and loans (5¾ percent of CESEE-EU GDP) to fund public investment under national recovery and resilience plans. - InvestEU scale-up: €5.6 billion to increase EU funding for private participation in infrastructure. - Cohesion policy program increase: €47.5 billion, with a large part expected to flow to CESEE-EU. - Western Balkans Investment Framework (WBIF): - Launched in 2009. - Allocated €1.3 billion in grants for some €20 billion investments over 10 years. - Three Seas Initiative (3SI) and Three Seas Initiative Investment Fund (3SIIF): - As of June 2020, Poland and Romania committed over €500 million in seed capital. - 3SIIF aims to raise a total of €5 billion to generate investments of up to €100 billion. ### Stylized facts and benchmarking - Public capital stock per capita in CESEE is about half of that of the EU15. - Within CESEE, heterogeneity exists: the Western Balkans have less than a third of the per capita capital stock of EU15; the CESEE-EU group is closest to the EU15 level. - Public investment rate (percent of GDP) after the global financial crisis has remained comparable to or even exceeded that of the EU15, reflecting CESEE’s low initial public capital stock. - Physical infrastructure gaps (percent deviation from EU15 averages; 2018 or latest available): - Electricity generation capacity per 1 million people: CESEE on average is some 50 percent less than the EU15 average. - Country variation: Moldova shortfall of about 90 percent; Czech Republic shortfall of about 10 percent. - Roads and railways (normalized for arable land area): on average some 60 percent (roads) and 40 percent (railways) below the EU15 level. - Country variation: Slovenia exceeds EU15 levels in railway density; Bulgaria, Kosovo, Moldova, and Ukraine have road gaps of about 80 percent; Turkey has a railway gap of more than 75 percent. - Other sectoral measures shown for 2018 or latest available year include internet density (subscribers per 100 people), fixed line phone density (subscribers per 1,000 people), mobile phone density (subscribers per 1,000 people), and air passengers (per capita); physical measures reveal considerable cross-country variation. - Benchmarking approaches used: - Stock of public capital as a proxy for infrastructure (public capital correlates strongly with infrastructure and has better data coverage). - Physical measures in energy, transport, and ICT sectors compared to EU15 averages. - Simple econometric model of demand for physical infrastructure to estimate current investment gaps and the infrastructure needed to reach the EU15 average per capita income; results broadly consistent across approaches. - Water and sanitation were excluded from the main sectoral benchmarking because CESEE gaps are significantly smaller (share of population with access to basic water and sanitation services about 3–4 percentage points lower than EU15 average). ### Policy implications and post-pandemic priorities - Infrastructure push can be an essential part of the post-pandemic recovery, with emphasis on: - Reprioritizing investments toward digital and green infrastructure. - Achieving value for money and optimal risk allocation in bankable projects given stretched budgets and high uncertainty. - Enhancing governance for state-owned enterprises (SOE) and infrastructure project management. - Cross-border projects are more successful when they: - Have clear payoffs for individual countries. - Are governed by the EU framework, which supports transparency, adherence to international standards, better planning, and greater coordination. *Source: iceseebmipiea - 1. Real Public Capital Stock: CESEE (PDF chapter).* ### 1. Electricity Generation Capacity Gap2. Internet Subscriptions Gap ### iceseebmipiea - 1. Electricity Generation Capacity Gap2. Internet Subscriptions Gap ### Infrastructure gaps by sector and metrics - Electricity generation capacity gap, internet subscriptions gap, fixed phone line subscriptions gap, cellular phone subscriptions gap, road density gap (arable land), railway density gap (arable land), and air transport gap are presented as negative/positive deviation charts relative to EU15 benchmarks (charts show ranges including values such as –120, –100, –80, –70, –60, –50, –40, –30, –20, –10, 0, 20, 40, 60, 100, 120). - EU15 benchmark averages reported in source: - EU15 average = 2,323 per 1 million people - EU15 average = 382 per 1,000 people - EU15 average = 9,469 km per 1,000 sq km of arable land - EU15 average = 4 passengers carried per capita - EU15 average = 276 km per 1,000 sq km of arable land - EU15 average = 1,201 per 1,000 people - EU15 average = 37 per 100 people ### Quality of infrastructure and digital/connectivity observations - CESEE lags EU15 in digital infrastructure measured by internet subscriptions per 100 people. - Mobile phone density in CESEE is close to EU15 levels, possibly reflecting private-sector role in mobile phone infrastructure. - Business executives’ subjective assessment: quality of overall infrastructure in CESEE is lower than in the EU15 (Figure 6; 1–7 [best] score, GDP PPP-weighted averages). - Gaps in CESEE-EU are somewhat smaller than the rest of CESEE. - COVID-19 highlights importance of social infrastructure (health care and education); Box 2 compares selected health infrastructure aspects. ### Illustrative costing approach and assumptions - Method: Translate physical unit gaps into monetary amounts using sector unit costs from literature (main source: Yepes (2008), adjusted for inflation). - Assumption: CESEE countries close half of the estimated current gaps relative to the EU15 by 2030. - Aggregation: Calculate separately for transport, telecom, and electricity production capacity; for transport use measures based on total land area, arable land, and population size. - Target year: 2030. ### Key unit costs used (inflation-adjusted, USD) - Electricity generation per kW of added capacity: 2,970 - Roads per km: 608,794 - Railways per km: 1,336,378 - Airports per person: 8 - Fixed telephone line subscription per subscription: 861 - Mobile telephone subscription per subscription: 668 - Broadband internet subscription per subscription: 566 ### Aggregate investment needs and scenarios (summary) - CESEE needs in the next 10 years: 3–8 percent of GDP per year to close 50 percent of the infrastructure gap relative to EU15 (Table 2). - An alternative econometric approach suggests total costs of about 5.5 percent of GDP for the current year (Annex 1). - Comparison with related studies: - Schwartz and others (2020): average annual infrastructure need of 2.7 percent of GDP for roads, electricity, and water and sanitation in emerging markets. - World Bank Beyond the Gap and Global Infrastructure Hub and Three Seas Initiative provide other estimates; Three Seas Initiative envisages needs of 8 percent of GDP. ### Table 2 excerpted numeric rows (as presented) - "% of GDP/year" (row in Table 2, panel A): 8.4 7.0 2.8 4.2 0.6 3.4 4.3 7.9 7.9 - "Total cost by 2030 (billion USD)" (row in Table 2, panel A): 3670 3063 1237 1843 2532 1481 1899 1291 3453 - "% of GDP/year" (Table 2, panel B for country subgroups CESEE-EU, Western Balkans, Other Large EMs across ABC scenarios): 1.7 2.9 1.9 7.9 12.0 7.1 2.7 9.3 3.1 - "Total cost by 2030 (billion USD)" (Table 2, panel B): 278 473 305 144 219 130 324 823 718 02 - Note: numbers are presented in source as concatenated table entries; see original for full table layout and subgroup labels. ### Subregional heterogeneity and specific findings - Western Balkans: largest infrastructure gaps across all sectors; estimated needs about 7–12 percent of GDP per year to close 50 percent of the gap relative to EU15; implies additional investment of about 4–9 percent of GDP per year given current investment levels. - Other large EMs: estimated total costs about 3–13 percent of GDP annually, driven by land transportation gaps (Russia accounts for a large share when measured in monetary amounts; scaling by population reduces Russia’s per-capita needs). - CESEE-EU: smallest estimated total costs between 2–3 percent of GDP annually; completely closing gap by 2030 would raise CESEE-EU estimated total costs to 3½–6 percent of GDP annually. ### Caveats and limitations of cost estimates - Estimates reflect the goal of closing half of the infrastructure gap and do not account for additional investment to improve quality or climate resilience. - Equal weighting across sectors is assumed; country priorities may differ (e.g., digital infrastructure, health care). - Unit costs are assumed identical across countries despite differences in infrastructure quality and labor costs. - Other costs not considered include environmental costs and opportunity cost of capital. - Cost estimates are illustrative and should not be interpreted as recommended investment; country-specific detailed analysis is required to determine feasible investment envelopes. ### Health care infrastructure (Box 2) — selected indicators (2018 or latest available) - Relative to EU15, CESEE: - Higher number of hospital beds per capita (per 100,000 people). - Fewer MRI and CT scanners per capita. - Lower Global Health Security Index scores (0–100 range) for almost all CESEE countries compared with EU15 average. - Data sources: Eurostat; Global Health Security Index; national sources; IMF staff calculations. ### Macroeconomic impact of infrastructure (Chapter 3) — empirical findings - Approach: Identify public investment booms as significant, sustained increases in public investment-to-GDP ratio; use local projections framework to trace dynamics of GDP, private investment, and public debt after boom onset. - Stylized empirical findings: - Public investment booms are associated with a sizable and statistically significant increase in real output. - Implicit fiscal multiplier on impact is about 1.7 (increase in output for a euro spent on public investment). - CESEE exhibits larger output increases following public investment booms compared with EU15 (CESEE point estimates larger and statistically significant in first few years). - Private investment response: point estimate positive but not statistically significant (no conclusive evidence of crowding-in). - Public debt: public-debt-to-GDP appears to decline following a boom, but estimates are imprecise (no conclusive evidence of sharp rises in public indebtedness). - Identification caveats: booms are sparse and may not be exogenous; alternative specification using public investment shocks (unexplained residuals) is discussed in Annex 2 to isolate plausibly exogenous shocks. - Factors that affect effectiveness of public investment include cyclical stance (recession vs expansion), efficiency of public investment, and initial stock of public capital. _ Sources: World Economic Forum, 2019 Global Competitiveness Report; and IMF staff calculations. _ ### 1. Output ### iceseebmipiea - 1. Output ### Output responses to public investment booms - The episode is normalized such that public investment as percent of GDP increases by 1 percentage point on impact. - Cumulative response of GDP growth is reported for CESEE and EU15; t = 0 is the year of the shock; dashed lines denote 90 percent confidence bands. ### Role of the economic cycle and structural factors - Impact by cycle: - An unanticipated unit increase in public investment during recessions raises output by about 2 percent. - The impact during expansions is much smaller and statistically insignificant. - Role of initial public capital stock: - The output response to a 1 percentage point increase in public investment is larger and statistically significant when the public capital stock is smaller. - Role of infrastructure quality: - The output response is larger and statistically significant when infrastructure quality is better (based on the World Economic Forum measure). - Interpretation and implications: - Larger multipliers during recessions can reflect greater slack and liquidity-constrained households. - Lower public capital stock implies larger returns from public investment. - Better infrastructure quality and governance enhance returns from public investment. ### Key empirical magnitudes and notes - The shock is normalized as a 1 percentage point increase in public investment as percent of GDP on impact. - Findings are based on global sample estimation with CESEE- and EU15-specific dummies where indicated. - Dashed lines in figures denote 90 percent confidence bands. ### Model-based approach: setup - Model: IMF Global Integrated Monetary and Fiscal (GIMF) model (multi-region, forward-looking DSGE). - Production function treats public capital as complementary to private capital and labor. - Elasticity of output with respect to public capital is calibrated as 0.14. - Scenario design: infrastructure investment above baseline by 1 percent of GDP for a period of 10 years. - Monetary scenario: accommodative monetary policy where policy interest rates do not respond to demand pressures from higher infrastructure spending. - Regions and groupings: - CESEE-EUa: Estonia, Latvia, Lithuania, the Slovak Republic, and Slovenia. - CESEE-EUb: Bulgaria, Croatia, the Czech Republic, Hungary, Poland, and Romania. - Western Balkan region plus Belarus and Moldova. - Large emerging European economies: Turkey, Russia, and Ukraine. - Remaining two regions: rest of the euro area and rest of the world. ### Model simulations: financing options (CESEE-EUb example) - Financing scenarios considered: domestic public debt, higher consumption taxes, lower public consumption. - Debt-financing scenario: - Higher infrastructure investment by 1 percent of GDP leads to higher real GDP by about ½ to 1 percent immediately during the first year and by 2 to 3 percent over a decade. - Public debt to GDP ratio peaks at about 5 to 6 percentage points above the baseline in 2030. - Increase in public indebtedness is less than the assumed increase in public capital (10 percent of GDP over a decade) due to positive output effects. - Current account deficit widens initially, turning into surplus once public investment subsides. - Consumption tax financing scenario: - Long-term response of GDP and private investment similar to debt financing. - Short-term economic impact somewhat lower due to lower private consumption. - In the long term, public indebtedness is substantially lower than in the debt-financing scenario. - In this scenario, the consumption tax to GDP ratio gradually increases to reach 1 percentage point above its steady state level over two years. - Lower public consumption financing scenario: - Public consumption as share of GDP gradually declines to reach 1 percentage point below its steady state level over 5 years. - Long-term impact on economic activity comparable to other scenarios. - Public debt remains broadly stable; private consumption does not drop as much as under higher consumption taxes. - Common long-term result: - Regardless of financing type, GDP would rise above its steady-state value by about 2½ percent in all CESEE subregions. - Short-term macroeconomic aggregates and fiscal outlook differ materially by financing mode. - Partial financing by external grants would further increase positive impact. ### Model simulations: public investment efficiency - Baseline assumed efficiency in CESEE: 85 percent (meaning 15 percent of funds are lost due to inefficiencies). - GIMF calibration details: - Public investment efficiency set at 82.5 percent for large emerging markets and the Western Balkan region. - CESEE-EU countries set at 88.5 percent. - Euro area efficiency at 92 percent. - 100 percent is the theoretical upper bound. - Efficiency shock: - If public investment efficiency were higher by 10 percent, the 1 percent of GDP public investment increase would raise GDP by a further ½ percent. - Private investment and consumption would each rise by approximately ¼ of a percent. - Implication: higher efficiency leads to larger crowding in of private investment, higher output, and lower public debt. ### Model simulations: spillovers and coordination - Simulations compared: 1. Public investment shock in one region only. 2. Coordinated increase across all CESEE subregions (each spends 1 percent of GDP on infrastructure over 10 years). 3. Coordinated increase plus improved connectivity: gradual decline in non-tariff barriers to trade by 5 percent across regions over 10 years. - Findings: - Coordinated investment without improved connectivity produces gains similar to a single-region shock, reflecting low current intraregional trade levels. - Largest impact on growth occurs when coordinated investments improve connectivity and reduce trade costs. - Cross-border projects can yield almost double the impact on trade relative to single-country implementation (calibration based on literature). - Additional benefits include improved energy security from cross-country grid and storage integration. - Caveat: - Significant delays in cross-border projects can lower expected return; analysis of eight flagship transport projects found six unlikely to operate at full capacity by 2030 as planned in 2013. ### Monetary accommodation and other considerations - Under accommodative monetary policy, higher infrastructure spending can have larger positive effects on output given high private savings and potential slow private demand recovery post-COVID-19. - Cross-country coordination and higher public investment efficiency amplify growth benefits and improve fiscal outcomes. *Source: IMF staff calculations and chapter content from the provided PDF.* ### 1. GDP ### 1. GDP ### Model simulations: coordinated infrastructure investment and efficiency gains - Coordinated infrastructure investment and improved regional connectivity raise short-term and medium-term output and other macroeconomic variables across CESEE. - If interest rates remain accommodative in response to the new infrastructure investment (policy rates do not rise), economies would enjoy short-term output dividends of about 2 to 3 percent of GDP. - In the accommodative monetary policy scenario, policy rates increase only by 0.4–0.6 percentage points over the next 10 years. - Model simulations compare: - Higher Efficiency of Public Spending - Coordinated investment - Coordinated investment and lower non-trade barriers ### Role of monetary policy: active vs. accommodative - Under accommodative monetary policy (limited policy tightening), gains from infrastructure investment are materially larger than under active tightening. - The analysis notes similar outcomes would arise under persistently low world interest rates due to a global saving glut. ### Convergence to EU15: per capita PPP GDP implications - Baseline scenario follows June 2020 World Economic Outlook Update forecasts for CESEE and the EU15 through 2025 and beyond. - Public investment scenario incorporates: - increase in public investment efficiency, - persistently low interest rates, - rise in regional connectivity from public investment. - Infrastructure spending can speed up convergence to EU15 living standards as supply-side gains materialize over the medium to long term. - Effect magnitudes depend on openness, share of credit-constrained households, and initial capital stock; however, higher efficiency of public spending dominates the convergence effect. - Example: the per capita GDP gap between CESEE countries in the euro area and the EU15 would decrease by almost 5 percentage points under higher efficiency/public investment assumptions. - Convergence gains are smaller in the Western Balkan and Large EM regions, in part due to lower efficiency of public investment. ### CESEE region definition and sample - Note: CESEE-EUb includes Bulgaria, Croatia, the Czech Republic, Hungary, Poland, and Romania. - Country group definitions referenced for PPP comparisons include CESEE-EUa, CESEE-EUb, WB, and Large EMs. ### Infrastructure ownership, challenges, and objectives - Most CESEE infrastructure is owned and operated by the public sector (central government, subnational governments, state-owned enterprises), with some shared ownership and private sector participation across ICT, Energy, Water, Transport, Health, and Education sectors. - Identified challenges: - SOE-dominated sectors with high social returns. - Historically limited private infrastructure finance. - Limited risk mitigation tools. - Shallow capital markets. - Coordination and regulatory/legal restrictions for cross-border projects. - Structural constraints (compatibility, general government vs. municipal responsibilities). ### Mobilizing private participation and cross-border projects - Policy objective: create an enabling environment to mobilize private participation in infrastructure and increase cross-border projects. - Constraints to private participation highlighted include limited risk mitigation tools, shallow capital markets, and regulatory barriers. - Building capacity for cross-border infrastructure projects is emphasized given limited connectivity within CESEE. ### Enhancing infrastructure governance: Public Investment Management (PIM) and PIMA diagnostics - Investment efficiency hinges on infrastructure governance: planning and selection, implementation, and maintenance. - The IMF’s Public Investment Management Assessment (PIMA) evaluates public investment management institutions across the entire public investment cycle—planning, allocation, and implementation—based on 15 criteria. - PIMA findings for CESEE (based on nine countries with PIMAs completed since 2016) show: - The design of PIM institutions tends to be better than their effectiveness. - CESEE average PIMA scores are similar to emerging market economies, but effectiveness is below assessed EU15 and substantially below best practice. - Common weaknesses in the PIMA effectiveness scores for CESEE: - Planning phase: poor integration of national and sectoral strategies; weak linkage between planning and budgeting. - Project appraisal: inadequate costing; risks not properly identified and quantified. - Multi-year budgeting: large deviations of execution from budget forecast; inadequate planning for maintenance. - Project selection: multiple pipelines; weak or no cost-benefit analysis. - Portfolio management: weak project management; poor systematic project implementation reviews. - Project implementation: limited ex post audit of major projects. - Procurement: identified as an area of weakness in implementation. - PIMA coverage and notes: - Published PIMAs at end-2019 for Estonia, Kosovo, the Slovak Republic, and Ukraine. - PIMAs undertaken but not published for Albania, Bosnia and Herzegovina, Bulgaria, Moldova, and Serbia (some findings available in other publications). - The PIMA for North Macedonia in 2020 was not finalized by the time of publication of this study. - Some countries may have improved public investment management systems since these assessments were completed. ### Policy implications and priorities - With limited fiscal space, maximizing the benefits of infrastructure investment is essential. - Priorities include: - Strengthening infrastructure governance across planning, allocation, and implementation stages. - Improving PIM effectiveness: integrate national/sectoral planning with budgeting, strengthen project appraisal and costing, and enhance multi-year budgeting and maintenance planning. - Mobilizing private capital by improving the enabling environment, risk mitigation tools, and deepening capital markets. - Building capacity for cross-border projects and addressing regulatory and coordination constraints. - Ensuring robust procurement, portfolio management, implementation oversight, and ex post audits to improve execution and value for money. *Source: IMF staff calculations.* ### 15. Monitoring of Public Assets ### 15. Monitoring of Public Assets ### Public Investment Management (PIM): weaknesses across phases - Planning and appraisal - Weaknesses in oversight and reporting of infrastructure managed by subnational governments and SOEs. - Separate PIM rules for EU-funded and nationally-funded investments can reduce effectiveness (example: Slovak Republic—EU-funded projects follow EU rules and coordination is strong; nationally funded projects handled separately and may face less scrutiny). - Most CESEE countries would gain from better appraisal processes that more rigorously and consistently analyze long-term costs, benefits, and risks. - Good practice elements: (1) a clear and objective methodology and process; (2) rigorous analysis of costs, benefits, and risks; (3) inclusion of maintenance costs; and (4) independent review. - Specific country examples: Kosovo and Ukraine lack medium-term funding frameworks prepared on a full cost basis. - Serbia in 2019 introduced a centralized process for appraising and selecting projects, supported by an integrated project database. - Allocation (project selection and multiyear budgeting) - Project selection and multiyear budgeting are two areas of weakness in design and effectiveness. - Recommended improvements: ensure appraisals are reviewed before decisions, adopt standard and transparent selection criteria, maintain a pipeline of projects reflecting the country’s infrastructure strategy. - Two-thirds of CESEE authorities’ self-assessment survey respondents report project selection/multiyear budgeting as one of their weaker areas. - PIMAs indicate insufficient budget comprehensiveness (e.g., reporting all projects in the budget regardless of funding source; reporting capital and recurrent spending together). - Need to enhance processes for maintenance funding (self-assessment survey rates maintenance funding relatively low). - Implementation (procurement, portfolio management, oversight) - Effectiveness of procurement, portfolio management and oversight, and management of project implementation often fall significantly short of best practice. - CESEE self-assessment survey: management of project implementation had the lowest average rating. - Procurement transparency is generally present, but procurement practices, project adjustment procedures during implementation, and ex post evaluation need improvement. - Estonia highlighted as strong in implementation due to electronic procurement, an effective treasury single account, transparent asset monitoring through full accrual accounting for the entire public sector, and active project management. - Contrasting weaknesses: uncertainty over funding availability for capital spending due to protection of current spending and weak cash management (examples: Albania and Moldova, where external funding delays also matter). ### Minimizing fiscal risks from infrastructure - Nature and timing of risks - Infrastructure risks stem from project design, construction, operation, macroeconomic factors, and government actions; highest during development phase and typically decrease toward operational phase. - Common risk types across lifecycle include political/legal/regulatory, macroeconomic, technical, governance, and financial risks (see Table 3 for detailed mapping by phase). - Challenges in risk assessment and management - Assessing and managing fiscal risks from public investment is challenging; methodologies for risk quantification are still underdeveloped. - Project outcomes can deviate significantly from forecasts; long-term demand forecasts are especially difficult for “greenfield” projects. - Some projects may overestimate demand and underestimate user fees to make projects financially and politically viable. - Fiscal transparency is weak regarding risk analysis and management; fiscal risks are often not adequately disclosed, and reporting frequency and timeliness can be improved. - Fiscal transparency evaluations (FTE) have been conducted for only six CESEE countries; Akitoby and others (2020) use an expert survey to expand coverage. ### Survey and PIMA findings on risk practices - Survey of CESEE governments (spring of 2020) - Authorities identified the following as key sources of risks: implementation delays; cost overruns; changes in scope and design of a project; challenges in accurately forecasting revenues. - Other serious issues singled out: regulatory uncertainty, difficulties in coordination among actors (levels of government, government and private sector, cross-country), and financial risks. - Quantified survey signals (presentation of findings) - Risk coverage and monitoring, risk analysis, and management of financial risks are “not present” or “only somewhat present” in about half of CESEE countries. - Hedging project-specific risks is particularly rare. - Implication: scope to improve institutional arrangements for integrated risk management, expand risk types analyzed (contingent liabilities, SOE and PPP risks), better quantify size and probability of risks, and adopt portfolio approaches accounting for risk correlations across projects. - PIMA review results - Three of the nine CESEE country PIMAs found that risks were not systematically assessed as part of project appraisal. - Where risks were included, mitigation plans were prepared in only one country. - In four of the nine CESEE PIMAs, contingent liabilities arising from capital projects of subnational governments, public corporations, and PPPs were not systematically reported to the central government. ### SOE governance and fiscal implications - SOE role and governance gaps - SOEs own and operate a large share of the region’s infrastructure; improving SOE governance would boost infrastructure efficiency. - Governance shortfalls contribute to soft budget constraints and budgetary risks. - Needed improvements: more independent and professional boards, stricter financial reporting and auditing, and a more transparent relationship between central government budgets and SOEs. - Examples and impacts - Belarus: SOEs receive off-balance sheet support including capital injections and debt assumption, with quasi fiscal transfers amounting to 2 percent of GDP per year over 2014–19. - Contingent liabilities from guarantees and SOE support are generally not provisioned for and can increase public debt. ### Increasing private participation in infrastructure - Current patterns - Central and subnational governments dominate social infrastructure provision; SOEs play a large role in economic infrastructure. The private sector is relatively limited except in ICT and energy. - Private participation mainly via PPPs and asset recycling (selling or leasing existing public assets to private operators and using proceeds to fund new investments). - Survey on asset recycling: 38% Agree, 54% Somewhat, 8% Disagree with the statement that authorities use asset recycling to finance new public investments. - Quantitative indicators - PPPs amounted to about 0.5 percent of GDP per year on average in CESEE over the last decade. - PPP prevalence is greater in CESEE-non-EU, where PPPs have amounted to about a quarter of total public investment. - Private infrastructure finance in CESEE: stood at 0.9 percent of GDP at the end of 2019 and averaged 0.6 percent of GDP over the last decade. - Considerations and safeguards - Private participation can be desirable to improve efficiency and help overcome temporary budget constraints, but public goods characteristics, equity, market imperfections, and natural monopoly features justify a significant public role and the need for effective regulators. - Private financing can be expensive; lifecycle efficiency gains of well-executed projects can outweigh potential contingent liabilities if contracts allocate risk appropriately and financing is robust to risks. - Greater private participation should not drive public investment decisions. *Source: iceseebmipiea - 15. Monitoring of Public Assets (PDF chapter).* ### Chapter 4.4 (OECD 2008). ### Chapter 4.4 (OECD 2008) ### PPP advantages and mixed evidence on efficiency - PPPs can mobilize private resources and know-how, leverage public funds, and improve service quality. - Evidence on whether PPPs provide infrastructure more efficiently than traditional public procurement is mixed. - PPPs involve potential future obligations by the government that should be considered upfront, mitigated where appropriate, and actively monitored and managed through project delivery and the life of the infrastructure asset. - Strong government capacity to design and manage PPPs, and robust governance processes to select projects and financing structures that maximize public benefit, are needed. ### Global private infrastructure finance (selected figures) - Total global private infrastructure finance volume in 2019: USD229 billion. - Portion attributable to projects in CESEE in 2019: about USD10 billion. - Time series markers in figure span 2005 through 2019 (labeled: 2005 06 07 08 09 10 11 12 13 14 15 16 17 18 19). - Example percentage values shown in figure: 1.0, 0.9, 4.0, 2.9 (as presented in source). ### Constraints and risks in CESEE PPPs - PPP institutional and financing frameworks appear somewhat weak in CESEE, which may entail important inefficiencies and hinder private investor participation. - Private investors face a variety of risks that are difficult to mitigate, lowering incentives to commit to high preparation costs for bid proposals due to: - Project implementation uncertainties and poor revenue visibility. - Poor project preparation and procurement practices (including insufficiently developed proposals, poor market sounding practices, and inadequately resourced or skilled government counterparts). - Unclear legal and regulatory frameworks (including price and quality regulation that applies to infrastructure service providers) leading to bidding delays and lack of transparency. - Investors generally prefer "brownfield" projects (renovating existing infrastructure assets or projects with established performance track records) because they offer greater stability of returns and simpler operational management. - Changes in tariffs, contract renegotiation, and cancellation of permits are quite common and add to regulatory uncertainty in many CESEE countries. ### Risk mitigation tools and market preferences - Many CESEE countries lack scalable and comprehensive risk mitigation tools to attract private investors. - Only a few countries offer guarantees to cover nonpayment risk or upgrade the rating of a transaction. - No country in the surveyed group offers liquidity facilities to hedge FX risk, nor guarantees to cover refinancing risk (as reported in Figure 29). - Institutional investors show increasing risk-taking in "greenfield" projects in the energy sector (as opposed to transportation, water, or information and communications technology), partly because construction periods tend to be shorter in the energy sector, reducing construction-associated default risk. ### Characteristics of more successful PPPs in the region - Successful PPP markets in the region (examples: Poland, Russia, and Turkey) tend to share three characteristics: - (1) A strong and transparent PPP framework with political commitment to support a strategic PPP agenda. - (2) A unified and standardized process to public investment (planning, allocation, implementation) across relevant institutions. - (3) Availability of highly skilled staff for project preparation, procurement, and contract management. - In some CESEE countries, private participation occurs via foreign direct investment and portfolio flows to executing companies due to limited depth of local financial markets, requiring adherence to international standards in public investment management. ### Policy issues and priorities (implicit from analysis) - Quantify and actively consider fiscal risks of PPPs when deciding on PPPs. - Strengthen PPP institutional and financing frameworks to reduce inefficiencies and enhance private investor participation. - Improve project preparation, market sounding, procurement practices, and capacity of government counterparts. - Clarify legal and regulatory frameworks, including price and quality regulation applicable to infrastructure service providers, to reduce delays and increase bidding transparency. - Develop scalable and comprehensive risk mitigation instruments (including guarantees for nonpayment, liquidity facilities for FX risk hedging, and refinancing guarantees) to attract a broader set of private investors. - Promote unified and standardized public investment processes and build skilled teams for project preparation, procurement, and contract management. *Source: Chapter 4.4 (OECD 2008) from iceseebmipiea - Chapter 4.4 (OECD 2008).* ### 1. Dispersion of the Quality of PPP Frameworks 2. PPP Procurement and Efficiency ### 1. Dispersion of the Quality of PPP Frameworks 2. PPP Procurement and Efficiency ### Dispersion of PPP framework quality: findings - IMF/World Bank PPP Fiscal Risk Assessment (PFRAM 2.0) was released in September 2019 and helps assess potential costs and risks from PPP projects at both individual project and portfolio levels. - Several CESEE countries have received IMF capacity development training on PPPs and/or PFRAM: Albania, Belarus, Latvia, North Macedonia, Montenegro, Serbia, Slovenia, and Turkey. - Identified dimensions of PPP project life cycle and corresponding procurement/ownership options (as presented): - Planning / Preparation: substantial planning and material financial resources required prior to construction. - Construction (“greenfield”): accounts for most capital outlays; project does not generate revenues. - Operation (“brownfield”): revenues generated by user charges or availability payments; mature projects generate steady and reliable cash flows. - Risk profile by phase: - Planning: significant uncertainty and risk. - Construction: higher level of risk and rising probability of default. - Early operation: rapidly declining default risk due to improving risk profile. - Financing types and investor roles by phase: - Early stage: specialist equity and high-cost debt investors; re-financing is difficult. - Construction: banks provide most financing and may seek to exit. - Operation: refinancing becomes more feasible and appeals to long-term investors (insurance companies, pension funds, and SWFs); long-term investors mostly interested in operational projects; rarely early-stage equity investors. - Investment funds may participate in any phase depending on funding structure, type, and mandate. - Project contract types and whether they constitute PPIs that are PPPs: - Non-PPP: Build (B), Design-Build (DB), Design-Build-Finance (DBF) — government retains post-construction responsibilities in DBF. - PPP: Design-Build-Operate-Maintain (DBOM), Design-Build-Finance-Operate-Maintain (DBFOM) and equivalents (BOT, BOOT, BTO) — whether DF(B)OM is a true private finance PPP depends on effectiveness of risk transfer and links between performance and revenue. - Other private involvement: management/service contracts (service PPPs) and private-promoter regulated operation projects. - Survey evidence (CESEE Infrastructure Survey): - Perceived sources of risk for private investors include: tariffs changed in the past; asset transfer restrictions; contract renegotiations; permits cancelled in the past. - Risk mitigation instruments cited as useful include liquidity facilities to hedge FX risks, guarantees/insurance to cover re-financing risk, guarantees/insurance to cover non-payment risks, and credit enhancement to upgrade transaction ratings. ### PPP procurement and efficiency: findings and implications - Key procurement and contractual risk mitigants: - Routine monitoring and triggers for enhanced reporting and controls to allow early intervention to mitigate risks of contractual failures. - Need for transparency in procurement practices. - Capacity building needs: - Strengthen skills and knowledge to manage PPPs in procuring agencies and in Ministries of Finance to safeguard fiscal positions. - Recommendation to explore mechanisms attracting private involvement via more effective risk allocation, while balancing with prudent fiscal risk management. - Suggested approach to guarantees and guarantee schemes: - Streamline, coordinate, and expand existing guarantee offerings to target specific risks, especially during early-stage development that are difficult for private sector to manage. - Careful evaluation required: consider government fiscal risks, expected return, and optimal allocation of risk. ### Risk mitigation instruments for infrastructure finance (instruments and considerations) - Instruments and typical uses: - Liquidity facilities to hedge against FX risks (for example, until tariffs/inflation adjusts). - Guarantees/insurance to cover re-financing risk. - Guarantees/insurance to cover non-payment risks (for example, for state-owned enterprises). - Credit enhancement and guarantees to upgrade the rating of a transaction. - Common guarantee and fiscal considerations: - Guarantees issued by national/subnational governments, multilateral/bilateral institutions, development banks, and other public entities may have direct and indirect budget impacts. - Guarantees can reduce repayment and foreign exchange risks, lowering cost of credit and potentially making projects eligible for institutional investors with regulatory constraints. - Expanded use of guarantees must be balanced with prudent fiscal risk management to avoid large contingent liabilities and moral hazard. - Specific instruments and caveats: - Minimum revenue guarantees (MRG): suitable for commercially viable projects with revenue uncertainty; risk of political vulnerability and reduced contractor incentives if contractual covenants are weak. - Guarantees, letters of credit, and insurance contracts: mitigate performance risk; include liquidated damages and performance support instruments. - Export credit guarantees: provided by export credit agencies; mitigate political and commercial risks related to exports of goods and services. - Grants: reduce financing costs during development and construction or stabilize revenue in operation; can be lump-sum, tied to revenues, or tied to project milestones. - Taxation incentives: reducing or suspending property taxes or extending tax breaks can act as fiscal transfers/subsidies across project life. ### Cross-border coordination: findings, benefits, and risks - Cross-border projects can amplify macroeconomic benefits by integrating markets, connecting communities, and promoting trade, finance, and investment. - EU initiatives referenced: - InvestEU: about 20 percent of all supported projects are cross-border; 80 percent of these projects involve at least one CESEE country; none involve only CESEE-EU countries, suggesting mainly EU15–CESEE-EU connections. - The total amount invested over this time period is roughly €255 billion. - EFSI/InvestEU data: Cross-border infrastructure projects involving EU-CESEE countries account for 16 percent of signed projects (2015–20); domestic infrastructure projects (EU-CESEE countries) 3 percent; cross-border infrastructure projects (only EU15) 5 percent; domestic infrastructure projects (only EU15) 30 percent; Other 46 percent. - Cross-border project risks (Table 5 summary): - Political/Legal/Regulatory: different regulatory/legal frameworks, potential asymmetric information in planning/allocation/implementation, permit cancellation, contract termination, asset transfer restrictions. - Macroeconomic: asymmetric shocks and risk spillovers; unilateral (uncoordinated) macro policy choices. - Technical: more difficult procurement, cost-benefit analysis, project selection, contract design; additional approvals and coordination/monitoring challenges. - Financial: more difficult risk-sharing and structuring of payments and guarantees; counterparty and non-payment risks. - Survey evidence on cross-border project challenges (CESEE Infrastructure Survey): - About half of surveyed countries reported project-related issues (for example, difficulties in estimating costs and cash flows) as serious problems. - About half reported political uncertainty and inconsistent regulatory frameworks across countries as problems. - Cost sharing allocation across countries and lack of institutional framework for cross-border coordination were reported as problematic by about 30 percent of respondents. - Features of successful cross-border projects in CESEE region case studies: - Clear payoffs and risk-sharing mechanisms (mostly in transport and energy sectors). - Adherence to international standards (reducing uncertainty), often driven by EU funding conditionality. - Clear coordination and monitoring protocols and strict transparency rules. - Failure drivers: - Extensive implementation delays and ineffective selection processes. ### Infrastructure investment after the COVID-19 pandemic: implications and policy recommendations - Pandemic impacts on infrastructure: - Revealed deficiencies in sectors such as health and digital connectivity. - Disrupted ongoing projects, lowered demand and/or ability to pay for services, caused revenue shortfalls for SOEs, and potential realization of contingent liabilities that drain fiscal resources. - Considerations for scaling up public investment as stimulus: - Public investment has high multiplier, especially during recessions, but is not appropriate for all countries and depends on the quality of infrastructure governance. - Some CESEE countries (Croatia, Estonia, Hungary, Poland, Romania) are already planning to include infrastructure projects in stimulus packages. - European Commission called countries to protect public investment and focus on green and digital priorities. - Constraints and risks to scaling up: - High uncertainty about future economic structure, demand for infrastructure, and costs (e.g., rising demand for digital infrastructure; unclear prospects for energy and transportation). - Current projects face implementation delays, lower revenues, higher costs, credit stress, force majeure disputes, guarantees being called. - Policies protecting consumers during the crisis (moratoria, payment deferments, price freezes) could jeopardize utility financial viability and appetite for new projects. - Both public and private balance sheets will carry higher debt post-pandemic; private savings may increase; government bond interest rates likely low for extended period, creating search-for-yield opportunities. - Increased role of government in large projects can raise opportunities for corruption if controls and accountability are weak. - Policy recommendations: - Review and reprioritize capital spending to reflect changes in the economy; reassess project pipeline to choose well-planned projects that deliver highest growth and other benefits relative to cost. - Begin pipeline reassessment quickly to identify high-quality projects, ensure readiness for implementation, and identify early capacity constraints (procurement systems, access to capital, labor, materials). - Maintain flexible policy responses to support ongoing projects, accompanied by enhanced transparency, controls, and accountability in project planning, allocation, and implementation. - Strengthen infrastructure governance (PIMA recommendations relevant) and consider undertaking assessments to obtain tailored action plans. - Mobilize private involvement and financing through better governance and by aligning project design and financial structures with investor needs, while ensuring fiscal risks are fully understood and managed. - Use recovery to promote investment that enhances socioeconomic resilience and avoids locking in carbon-intensive growth; prioritize climate-smart network infrastructure projects and adaptation measures. - Climate and long-term green investment considerations: - Public investment programs shape carbon emissions for decades; countries should avoid locking in carbon-intensive growth. - For CESEE, the average investment need for climate mitigation through 2030 is estimated at roughly 1.5 percent of GDP per year. - Green public investment is likely cost effective over the long term given macroeconomic impacts of unmitigated climate change. *Source: INFRASTRUCTURE IN CENTRAL, EASTERN, AND SOUTHEASTERN EUROPE (chapter excerpts) — IMF staff and country authorities.* ### Box 3. Risk Mitigation Instruments for Private Infrastructure Financing ### Box 3. Risk Mitigation Instruments for Private Infrastructure Financing ### Risk mitigation instruments: categories, instruments, providers, and limitations - Political/Legal/Regulatory - Risks: Adverse changes in tariffs, taxation, social acceptance, regulation/laws, and contract enforceability; Permit cancelation, contract termination, asset transfer restrictions - Available instruments: Targeted guarantees/insurance covering political and regulatory risks (incl. partial risk guarantees) - Providers: MDBs, DFIs, MIGA, and ECAs - Limitations: Limited project eligibility in some other cases; also many MDBs require counter-indemnity from governments (in many cases) - Macroeconomic - Risks: Macroeconomic conditions (growth, inflation, domestic activity) - Available instruments: FX guarantees or targeted hedging instruments covering FX depreciation risk; Inflation-indexing of proceeds/revenues; Demand guarantees (minimum payment) - Providers: Commercial financial institutions - Limitations: Limited size, currency availability, tenor, and affordability - Technical - Risks: Force majeure, construction/operational/revenue risks - Available instruments: Contract design (guarantees, availability-based payment mechanism, offtake contracts); Demand guarantees (minimum payment) - Providers: EPC contractors; Governments, public agencies, and DFIs - Limitations: n.a. - ESG and technological risks - Instruments: ESG assessment; Technology guarantees - Providers: Insurance companies - Limitations: (Not specified) - Financial (regulatory and financing constraints) - Instruments: Mini-perms and project loan CLOs but no general re-financing possibility; Differentiated regulatory treatment limited to a few countries only - Providers: Commercial financial institutions, insurance companies/pension funds - Limitations: Limited availability of long-term debt finance; Limited (or no) differentiated prudential treatment of (long-term risk profile of) infrastructure for regulated investors - Non-payment risk - Instruments: Targeted guarantees/insurance covering non-payment risk - Providers: MDBs, DFIs, MIGA - Limitations: Limited risk appetite or coverage for SoEs; also many MDBs require counter-indemnity from governments (in many cases) - Counterparty risk - Instruments: Credit guarantees providing general coverage for debt financing - Providers: MDBs, DFIs, MIGA, ECAs, and monoline insurers - Limitations: Limited risk appetite for sub-investment grade transactions; also many MDBs require counter-indemnity from governments (in many cases) ### Cross-border projects in CESEE: survey summary, success factors, and examples - Survey findings and general points - Cross-border projects are more common in energy and communication where interconnection benefits compensate for larger coordination costs. - Need to agree on common standards and timing can lead to long delays in project implementation. - EU financing dominates cross-border projects and provides an effective coordination mechanism and ensures adherence to international standards in public procurement and project execution. - Factors that promote successful cross-border projects (from Figure 4.1) - Simple project - Clear payoffs for each country - Adherence to international standards - Coordination via supranational arrangement (EU) - Challenges - Coordination challenges causing delays in project implementation - Difficult/lengthy negotiations - Examples of cross-border infrastructure projects in CESEE - Railway line between Katowice (Poland) and Ostrava (Czech Republic): Currently under construction; EU supports the project providing 50 percent of financing under the Connecting Europe facility. - Natural gas pipeline between Ungheni (Moldova) and Iasi (Romania): A first step to connect Moldova’s capital Chisinau with the European network; financed by loans (EBRD and EIB) and grants (EU). - “Nordbalt” energy infrastructure project: Submarine power cable linking Lithuania with Sweden; cost co-financed by the EU under the European Energy Program for Recovery. - Water management projects at the Czech-Polish border: Implemented under EU programs, including flood-risk reduction; co-financed by the EU. - Motorway D52 between Brno (Czech Republic) and Vienna (Austria): Presented characteristics of successful cross-border infrastructure but suffered significant implementation delays. - Improvement of the Polish-Ukrainian portion of the European corridor (E40): Part of preparation for Euro 2012; successfully concluded but implementation suffered several delays on both sides. ### Low-carbon, climate-resilient (LCCR) infrastructure: needs, costs, and policy implications - Rationale and impact - Roughly two-thirds of global greenhouse gas (GHG) emissions are attributable to infrastructure. - Making infrastructure projects climate-smart helps transition toward a low-carbon, more environmentally sustainable economic model and mitigates effects of natural disasters and global warming. - Investment in modern, smart, and clean infrastructure over the next decade can boost short-term growth, enhance longer-term resilience, and reduce the carbon footprint of economic progress. - Scale of investment needs and offsets - Most projections suggest additional investments of more than US$1 trillion annually will be needed by 2030 to make infrastructure projects climate compatible. - Infrastructure worldwide has suffered from chronic under-investment; most investment will be in new projects, which will cost emerging market and developing economies up to 8 percent of GDP per year to 2030, depending on their ambition and spending efficiency. - Lower cost from renewable energy sources and greater energy efficiency are likely to offset these investment costs over time. - Some spending must also be allocated to accelerate retirement of legacy carbon-based infrastructure and ensure adaptation and structural transition are socially fair and inclusive. - Selected estimates cited - OECD (2017) estimate: US$6.3 trillion of infrastructure investment required annually on average between 2016 and 2030. - Climate-friendly infrastructure savings: fossil fuel savings totaling US$1.7 trillion annually, more than offsetting the incremental cost. - EU Commission commitments: spending 25 percent of its total budget on climate-change related actions for the next seven-year budget, which was increased to 40 percent under the EU Green Deal. - Policy implications for public investment - Governments should adopt strategic approaches to public investment to account systematically for contribution and vulnerability of infrastructure projects to climate risks in project identification, appraisal and selection. - Approaches need to be robust to uncertainty in local/regional climate change effects and require understanding of: - (1) climate impact of large projects (GHG emissions), - (2) sources, types, and sizes of damage/economic losses, - (3) project resilience to different natural hazards (“resilience score”), - (4) capacity to predict frequency/impact of future disaster shocks (“climate damage function”). - Le, Leow, and Seiderer (2020) provide guidance on integrating climate-related risks into infrastructure governance across planning, design, appraisal, selection, and financing of public investments. ### Conclusions: CESEE infrastructure gaps, costs, multipliers, and policy priorities - Infrastructure gaps and cost estimates - Narrowing physical infrastructure gaps relative to the EU15 by 2030 (closing 50 percent of the gap) could cost 3–8 percent of GDP annually; more to make the infrastructure stock climate resilient, green, and of EU15 quality. - Estimated additional infrastructure cost for CESEE to satisfy the current level of development is about 2 percent of GDP. - Macroeconomic impact and multipliers - Short-term multipliers: 0.5–0.8 - Long-term multipliers: 1.7–2.5 - Larger multipliers estimated during recessions, suggesting infrastructure investment can play a key role during recovery from the pandemic. - Model simulations: If efficiency of public investment in CESEE rose to current EU15 levels and coordinated public infrastructure investment were to lower non-tariff trade barriers by 5 percent, the dividend from higher investment could almost double in the long run. - Governance, fiscal risks, and private participation - Infrastructure investment entails long delays, large cost overruns, increased fiscal risks, and opportunities for corruption—challenges magnified in CESEE by weaker governance and transparency. - CESEE countries have room to improve public investment management frameworks, especially in project appraisal and selection, medium-term budgeting, procurement, and project implementation management. - Novel survey points to significant gaps in fiscal risk analysis and management in CESEE. - Recommendations: - Improve institutional frameworks for effective and integrated public risk analysis and investment management, including in SOEs. - Use IMF PIMA to develop action plans to strengthen infrastructure governance frameworks where needed. - Strengthen public investment and risk management for PPPs; use IMF/World Bank P-FRAM to assess PPP design options and long-term fiscal consequences. - Widen risk mitigation options for private investors while prudently managing public risks and ensuring public value to attract greater private participation. - Role in post-pandemic recovery - Infrastructure investment is a policy tool to support activity during the COVID-19 pandemic, given its high multiplier and capacity to boost productive capacity and accelerate green/digital transitions. - Crisis complicates scaling-up public investment due to stress on ongoing projects, stretched public sector balance sheets, and uncertain future demand. - Important actions: - Reprioritize projects toward digital and green infrastructure. - Strengthen governance as government roles expand. - Provide de-risking options for private investors prudently to safeguard fiscal position. - Well-calibrated strategy can place CESEE on a more sustainable development path with greater social and economic resilience. *Source: Box 3, Box 4, Box 5, conclusion, and Annex 1 from the provided IMF chapter content.* ### Annex Table 1. Additional Infrastructure Cost Estimates Based on Current Demand ### Annex Table 1. Additional Infrastructure Cost Estimates Based on Current Demand ### A. Infrastructure investment required to satisfy current demand - Total cost (billion USD) - CESEE: 90.5 - CESEE-EU: 15.8 - Western Balkans 1: 6.3 - Other Large EMs: 68.5 - % of GDP - CESEE: 2.1 - CESEE-EU: 1.0 - Western Balkans 1: 3.4 - Other Large EMs: 2.7 ### B. Infrastructure investment required to satisfy demand if they had current average GDP per capita of EU15 - Total cost (billion USD) - CESEE: 111.0 - CESEE-EU: 19.3 - Western Balkans 1: 8.1 - Other Large EMs: 83.6 - % of GDP - CESEE: 2.5 - CESEE-EU: 1.2 - Western Balkans 1: 4.4 - Other Large EMs: 3.3 ### Key contextual finding from the source text - "is somewhat higher at about 2.5 percent of GDP to satisfy the level of the EU15 (Annex Table 1). Given that CESEE’s current public investment averages at about 3 percent of GDP, these would translate into total infrastructure investment costs of about 5–5.5 percent of GDP." - Note: The numbers refer to additional investment costs for 2018. *Source: IMF staff calculations.* ### Annex 3. Macroeconomic Impact of Public Investment: Model Simulations ### Annex 3. Macroeconomic Impact of Public Investment: Model Simulations ### Model simulations — Role of cross-border coordination (summary of outcomes) - Real GDP (Percent difference) — Individual Region Investment (selected entries) - CESEE-AE: 2020 0.48; 2025 2.00; 2030 3.59; 2035 3.09 - CESEE-EU: 2020 0.69; 2025 1.73; 2030 2.57; 2035 2.34 - WB: 2020 0.73; 2025 1.81; 2030 2.82; 2035 2.70 - Large EMs: 2020 0.88; 2025 1.36; 2030 1.71; 2035 1.97 - Real GDP (Percent difference) — Improved Connectivity (selected entries) - CESEE-AE: 2020 0.92; 2025 2.82; 2030 5.13; 2035 5.08 - CESEE-EU: 2020 0.81; 2025 2.05; 2030 3.09; 2035 2.98 - WB: 2020 1.10; 2025 2.96; 2030 4.54; 2035 4.74 - Large EMs: 2020 0.94; 2025 1.49; 2030 1.90; 2035 2.22 - Real investment (Percent difference) — Individual Region Investment (selected entries) - CESEE-AE: 2020 0.72; 2025 2.06; 2030 2.93; 2035 1.74 - WB: 2020 1.27; 2025 2.26; 2030 2.67; 2035 2.20 - Real consumption (Percent difference) — Improved Connectivity (selected entries) - CESEE-AE: 2020 0.77; 2025 2.13; 2030 4.12; 2035 4.38 - WB: 2020 0.80; 2025 2.48; 2030 4.31; 2035 4.62 - Current account/GDP (Percentage point difference) — Improved Connectivity (selected entries) - CESEE-AE: 2020 –0.75; 2025 0.59; 2030 0.10; 2035 0.16 - WB: 2020 –0.63; 2025 0.56; 2030 0.04; 2035 0.09 - Primary surplus/GDP (Percentage point difference) — Improved Connectivity (selected entries) - CESEE-AE: 2020 –0.69; 2025 0.36; 2030 0.19; 2035 0.11 - WB: 2020 –0.74; 2025 0.42; 2030 0.19; 2035 0.11 - Government net debt/GDP (Percentage point difference) — Improved Connectivity (selected entries) - CESEE-AE: 2020 0.31; 2025 2.62; 2030 2.78; 2035 2.04 - CESEE-EU: 2020 0.34; 2025 3.41; 2030 4.86; 2035 4.00 - WB: 2020 0.11; 2025 2.57; 2030 3.35; 2035 2.74 - Large EMs: 2020 0.56; 2025 4.68; 2030 7.34; 2035 5.90 ### Model simulations — Role of monetary accommodation (comparative outcomes) - Real GDP (Percent difference) — Improved Connectivity versus Monetary Accommodation (selected entries) - CESEE-AE: Improved Connectivity 2020 0.92; 2025 2.82; 2030 5.13; 2035 5.08 - Monetary Accommodation 2020 0.93; 2025 2.92; 2030 5.21; 2035 5.15 - CESEE-EU: Improved Connectivity 2020 0.81; 2025 2.05; 2030 3.09; 2035 2.98 - Monetary Accommodation 2020 0.97; 2025 2.80; 2030 3.46; 2035 3.20 - WB: Improved Connectivity 2020 1.10; 2025 2.96; 2030 4.54; 2035 4.74 - Monetary Accommodation 2020 1.30; 2025 4.29; 2030 5.45; 2035 5.36 - Real investment (Percent difference) — Monetary Accommodation (selected entries) - CESEE-AE: Monetary Accommodation 2020 1.19; 2025 2.99; 2030 5.38; 2035 4.33 - WB: Monetary Accommodation 2020 1.98; 2025 7.14; 2030 6.66; 2035 3.78 - Real consumption (Percent difference) — Monetary Accommodation (selected entries) - CESEE-AE: Monetary Accommodation 2020 0.78; 2025 2.24; 2030 4.26; 2035 4.51 - WB: Monetary Accommodation 2020 0.93; 2025 3.21; 2030 4.73; 2035 5.04 - Current account/GDP (Percentage point difference) — Monetary Accommodation (selected entries) - CESEE-AE: Monetary Accommodation 2020 –0.74; 2025 0.52; 2030 0.11; 2035 0.15 - WB: Monetary Accommodation 2020 –0.60; 2025 0.58; 2030 0.09; 2035 0.37 - Government net debt/GDP (Percentage point difference) — Monetary Accommodation (selected entries) - CESEE-AE: Monetary Accommodation 2020 0.31; 2025 2.25; 2030 2.11; 2035 1.52 - WB: Monetary Accommodation 2020 0.11; 2025 0.79; 2030 2.27; 2035 1.80 ### Findings from CESEE authorities’ PIMA self-assessment (summary) - Coverage: - Authorities in 14 CESEE countries completed a self-assessment based on the current PIMA questionnaire. - Self-assessments are not directly comparable to formal IMF PIMAs due to differences in methodology and scope. - General comparison: - The average of the self-assessments exceeds the average scores from CESEE PIMAs completed by the IMF in almost all areas, and also compares favorably with the EU15 CESEE PIMAs. - Results are significantly higher than earlier PIMA results where available for that country, suggesting possible positive bias in self-assessments. - Respondents may have assessed institutions with "design" in mind, which typically scores higher than effectiveness. - Relative strengths identified (both self-assessments and formal PIMAs) - Fiscal rules - Budget comprehensiveness - Availability of funding - Monitoring of public assets - Relative weaknesses identified - Project appraisal and project selection (also weak in formal PIMAs) - Maintenance funding - Coordination between entities - National and sectoral planning - Management of project implementation - Procurement: - Respondents perceived procurement processes to be significantly stronger than average scores from CESEE countries formally assessed by PIMA. ### Infrastructure survey — scope, design, and key questionnaire elements - Survey administration: - Responses generally coordinated through the ministry of finance. - Received responses from 14 of 22 CESEE countries. - Objectives: - Complement PIMA findings on governance, fiscal risks, and mobilization of private capital. - Focus on characteristics and risks in infrastructure investments and availability of risk mitigation tools for private investors. - Capture differential impact of cross-border projects on infrastructure risks. - Questionnaire structure (12 questions, three sections) - Section 1 — General questions: - Ownership share by type of infrastructure (percent of book value) for central government, subnational governments, SOEs, private sector, shared ownership as of end-2019 (or latest). - Current amount (percent of GDP) and share of guarantees and PPPs (percent of existing stock) by infrastructure type. - Average maturity (<5 years, 5–10 years, 10–20 years, >20 years, “cannot tell”); share of FX-denominated financing categories; inflation-indexing categories. - Share of FX projects for which FX risk has been hedged (none, up to 20 percent, 20–40 percent, 40–60 percent, 60–80 percent, 80–100 percent, “cannot tell”). - Share (percent of contract value) of planned/executed public contracts (non-EU-funded) within scope of EU regulations—domestic and cross-border. - Examples of very good and very bad projects (executed vs cancelled) over last 5 years. - Section 2 — Governance of infrastructure investments: - Questions on how much specific risks affected implementation (cost overruns; implementation delays; revenue risk; funding shortfall; change in scope/design; changes in regulations; coordination issues; other) for domestic and cross-border projects. - Factors complicating cross-border projects (risk-sharing allocation; cost sharing allocation; lack of institutional frameworks; inconsistent regulatory frameworks; type of structure; project-related problems; political/regulatory uncertainty). - Evaluation of public sector risk management practices (monitoring of fiscal risks; project-level and portfolio risk analysis; differentiation between central government and SOE projects; quantification of project risks; contingency allocations; fiscal risk assessments covering PPPs, SOEs, guarantees; hedging of project-specific risks; guidelines for cross-border projects). - Section 3 — Participation of the private sector: - Recycling of public assets (leasing/sales to invest in new assets). - Practices regarding private investment risks (tariff setting reviews; ability to defer/amend termination payments; asset transfer restrictions; past cancellation of permits; past contract renegotiations; past tariff changes). - Availability of risk mitigation instruments to private investors (credit enhancement and guarantees; guarantees/insurance to cover non-payment risks; guarantees/insurance to cover refinancing risk; liquidity facilities to hedge FX risk). ### Project finance — role, characteristics, and contractual protections (summary) - Importance: - Project finance is the most important funding source of infrastructure in CESEE countries and emerging markets at large. - Structure: - Project finance involves unsecured lending for a standalone economic unit; repayment based solely on project cash flow. - Liability limited to contributed equity capital; lenders often have limited recourse to project sponsors, requiring strong contractual provisions. - Asset-heavy capital intensity, low-to-manageable operating risk, and long-term importance of services support higher leverage than similarly rated nonfinancial corporates. - Scope of information provision and monitoring oversight is typically greater than for traditional corporate borrowers. - Contractual features to mitigate default and maximize post-default recovery: - Construction risk transferred to a construction contractor via a turnkey construction contract specifying delivery of a functional asset at an agreed time and within budget and required performance parameters. - Economic incentives to mitigate performance risk, including liquidated damages and financial support instruments (for example, bank letters of credit or other performance support instruments). - Offtake contracts to mitigate price and demand risk, supporting predictable and resilient long-term revenue streams. - Liquidity risks can be mitigated through protective forward-looking covenants and reserving mechanisms. *Source: IMF staff calculations; Annex 3. Macroeconomic Impact of Public Investment: Model Simulations.* ### Annex 6. Risk Mitigation in ### Annex 6. Risk Mitigation in Infrastructure Project Finance ### Lender safeguards and structural features - Project finance transactions typically raise all necessary funding at financial close. - Detailed appraisals by lenders of all aspects of the project help ensure that key risks are identified, allocated and mitigated such that residual risk is within acceptable parameters. - Preparation of a detailed financial model should include whole life operating & maintenance costs, and periodic capital maintenance expenditures. - Evaluation of the impact of stress scenarios helps assess the project’s resilience. - Covenants ensure that projects cannot evolve beyond the agreed scope, underpinning a predictable trajectory for the business. ### Asset recovery and creditor rights - The high asset intensity of infrastructure places a premium on creditor rights and economic incentives for stakeholders to mitigate economic loss following a default. - Senior secured lenders benefit from first ranking security interests over all material assets, which would need to be legal, valid, binding, and enforceable (that is, perfected) on or before financial close. - A step-in regime (that is, step-in, cure, and step-out rights) provides senior secured lenders with appropriate rights and sufficient time to remedy a default. - Pre-agreed inter-creditor arrangements, including decision-making and voting procedures, remove uncertainty about senior lender control upon default (or upon triggering threshold covenants before senior lenders incur any economic loss). - Structural risk mitigation features are required to prevent other creditor claimants from emerging during a bankruptcy or administration process to challenge pre-agreed inter-creditor rights and security interests. - The strategic or essential nature of a profitable project creates collective interest by all stakeholders in averting default. *Source: Annex 6. Risk Mitigation in Infrastructure Project Finance* ### Chapter 2, IMF Country Report 18/47, Washington, DC. ### Chapter 2, IMF Country Report 18/47, Washington, DC. ### Technical assistance and public investment management assessments - International Monetary Fund (IMF). 2019a. “Estonia: Technical Assistance Report-Public Investment Management Assessment.” Washington, DC. - International Monetary Fund (IMF). 2019b. “Slovak Republic: Technical Assistance Report-Public Investment Management Assessment.” Washington, DC. - International Monetary Fund (IMF). 2019c. “Ukraine: Technical Assistance Report-Public Investment Management Assessment.” Washington, DC. - Khachatryan, Armine, W. Lindquist, O. Luca, J. K. Martijn, and A. Culiu. Forthcoming. “Managing Macro-Fiscal Risks of PPPs, Challenges and Lessons Learned.” Departmental Paper, International Monetary Fund, Washington, DC. - Richmond, Christine, et al. 2019. “Reassessing the Role of State-Owned Enterprises in Central, Eastern and Southeastern Europe.” IMF Departmental Paper 19/11, International Monetary Fund, Washington, DC. ### Public investment, multipliers, and productivity of public capital - Izquierdo, Alejandro, Ruy Lama, Juan Pablo Medina, Jorge Puig, Daniel Riera-Crichton, Carlos Vegh, and Guillermo Javier Vuletin. 2019. “Is the Public Investment Multiplier Higher in Developing Countries? An Empirical Exploration.” IMF Working Paper 19/289, Washington, DC. - Ligthart, Jenny E., and Rosa Martin Suarez. 2011. “The Productivity of Public Capital: A Meta-Analysis.” In Infrastructure Productivity Evaluation, edited by W. Jonkhoff and W. Manshanden, 5–33. Berlin: Springer Verlag. - Warner, Andrew. 2014. “Public Investment as an Engine of Growth.” IMF Working Paper 14/148, International Monetary Fund, Washington. - Presbitero, Andrea. 2016. “Too Much and Too Fast? Public Investment Scaling-up and Absorptive Capacity.” Journal of Development Economics 120: 17–31. ### Climate, green recovery, and resilience of infrastructure - International Monetary Fund (IMF). 2019e. “Chapter 6: Sustainable Finance: Looking Farther.” Chapter 6, Global Financial Stability Report, October, Washington, DC. - International Monetary Fund (IMF). 2020b. “Greening the Recovery.” Special Series on Fiscal Policies to Respond to COVID-19, Fiscal Affairs Department, Washington, DC. - Le, Tuan Minh, Wei-Jen Leow and Fabian Seiderer. 2020. “Chapter 15: Building Resilience in Infrastructure to Climate Change.” In Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment, edited by Gerd Schwartz, Manal Fouad, Torben Steen Hansen, and Geneviève Verdier. Washington, DC: International Monetary Fund. - Rozenberg, Julie, and Marianne Fay. 2019. Beyond the Gap: How Countries Can Afford the Infrastructure They Need While Protecting the Planet. Washington, DC: World Bank Group. - Zhang, Tao. 2020. “COVID-19: Opportunities for a Green Recovery.” Opening Remarks, Parliamentary Web Dialogue, Organization for Security and Cooperation in Europe, Vienna, May 22. ### Infrastructure financing, institutional investment, and asset-class development - Organisation for Economic Co-operation and Development (OECD). 2015a. “Infrastructure Financing Instruments and Incentives.” Directorate for Financial and Enterprise Affairs, Paris. - Organisation for Economic Co-operation and Development (OECD). 2015b. “Mapping Channels to Mobilize Institutional Investment in Sustainable Energy, Green Finance and Investment.” Directorate for Financial and Enterprise Affairs, February, Paris. - Organisation for Economic Co-operation and Development (OECD). 2018a. “G20/OECD/WB Stock-take of Tools and Instruments Related to Infrastructure as an Asset Class.” Background Report, July, Paris. - Organisation for Economic Co-operation and Development (OECD). 2018b. “G20 Roadmap for Infrastructure as an Asset Class.” Paris. - Weber, Barbara, and Hans Wilhelm Alfen. 2012. Infrastructure as an Asset Class: Investment Strategies, Project Finance and PPP. Hoboken, NJ: Wiley. - Vecchi, Veronica, Mark Hellowell, and Francesca Casalini. 2017. “Issues and Trends in Project Finance for Public Infrastructure.” In Structured Finance—Techniques, Products and Markets, edited by Stefano Caselli and Stefano Gatti, 127–52. Cham: Springer. ### Public-private partnerships (PPPs), fiscal risks, and procurement - Organisation for Economic Co-operation and Development (OECD).2008. “Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money.” Directorate for Financial and Enterprise Affairs. Paris. - World Bank, and Public-Private Infrastructure Advisory Facility (PPIAF). 2009. “Toolkit for Public-Private Partnerships in Roads and Highways.” January, Washington, DC. - Jobst, Andreas A. 2018a. “Credit Risk Dynamics of Infrastructure Investment—Considerations for Financial Regulators.” World Policy Research Working Paper 8373, World Bank Group, Washington, DC. - Jobst, Andreas A. 2018b. “Green Infrastructure Investment—Implications for Insurance Regulators.” Advisory Finance Group (AFG) Semi-Annual Workshop and Network for Greening the Financial System (NGFS) Stakeholder Outreach, World Bank Paper 131044, World Bank-IMF Annual Meetings, Nusa Dua/Bali, October 10. - Jobst, Andreas A. 2019. “Mobilizing Infrastructure Investment in Emerging Market and Developing Economies−Regulatory Considerations.” Impulse Remarks, Joint Seminar of the Insurance Development Forum (IDF) and the Bank of England, February 13, London. - Schwartz, Gerd, Ana Corbacho, and Katja Funke, eds. 2008. Public Investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks. New York: Palgrave Macmillian. ### Regional and sectoral infrastructure analyses relevant to Central, Eastern, and Southeastern Europe - Zuk, Piotr, Eva Polgar, Li Savelin, Juan Luis Diaz del Hoyo, and Paul Konig. 2018. “Real Convergence in Central, Eastern, and South-Eastern Europe.” ECB Economic Bulletin (3): 36–65. - Shepherd Ben, and John Wilson. 2006. “Road Infrastructure in Europe and Central Asia: Does Network Quality Affect Trade?” World Bank Policy Research Working Paper 4104, World Bank Group, Washington, DC. - Straub, Stéphane, Charles Vellutini, and Michael Warlters. 2008. “Infrastructure and Economic Growth in East Asia.” Policy Research Working Paper 4589, World Bank Group, Washington, DC. - Three Seas Initiative. 2019. “Facts and Figures.” Presentation, Warsaw, November 2. ### Methodological and macro-modeling references - Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 951: 161–82. - Kumhof Michael, Douglas Laxton, Dirk Muir, and Susanna Mursula. 2010. “The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure.” IMF Working Paper 10/34, International Monetary Fund, Washington, DC. *Chapter 2 reference list, IMF Country Report 18/47, Washington, DC.* --- _Source: https://www.imf.org/-/media/files/publications/dp/2020/english/iceseebmipiea.pdf_