Europe's slow train to nowhere

#CriticalThinking

Picture of Carlo Secchi
Carlo Secchi

Professor Emeritus of European Economic Policy at the Università Commerciale

Europe’s infrastructure gap stands high among the many problems challenging its economy, and particularly in the field of transport. The last few years of crisis and austerity have led national governments to slow their investments in this field, not least where maintenance work and the renewal of rolling stock are concerned.

These shortcomings should be placed against a background in which the European Union has over the last two or three decades devoted much attention to transport infrastructure, especially when cross-frontier links between neighbouring countries were concerned. It has been done so because for the single market to be truly effective, Europe must have a well-integrated infrastructure. This was clearly set out back in 1992 in the Maastricht treaty’s reference to trans-European networks (TEN) not only in transport, but in energy and telecommunications too.

Europe’s main problem will be attracting private capital to finance infrastructure through public-private partnerships

In the following year, a European Commission White Paper on growth, competitiveness and jobs underlined the pivotal role of TENs in the development of the internal market and for job creation. Then, in 1994, the European Councils of Corfu and Essen saw EU leaders approve 14 “priority projects” for transport and 10 for energy. That was followed in 1996 by guidelines for developing the promised European transport network.

In the context of the EU’s “Big Bang” enlargement, and to cope with various financial difficulties, the infrastructure plan was reviewed and expanded in 2004. Since then, the infrastructure gap between the EU’s older and newer member states has been reduced, but some considerable differences remain. In some of the older ones, the quality of their infrastructures has deteriorated because not enough has been spent on maintenance and the modernisation of ageing networks. In most of the newer EU countries, basic networks have still to be completed.

The financial picture is daunting. The cost of rehabilitating existing networks is now estimated at around €20bn a year, and on top of that there are huge new investment requirements. A study carried out in the context of the Commission’s 2011 White Paper on Transport, “Roadmap to a Single European Transport Area”, calculated that for Europe’s transport infrastructure to cope with the expected demand, investments of €1.5 trillion were needed between 2010 and 2030. The Commission estimated that just for the trans-European transport network from 2014 to 2020 the investment costs would be €500bn, half of which are needed to address the main bottlenecks, missing cross-border rail and inland waterway links and horizontal priorities like air and rail traffic management.

The cost of rehabilitating existing networks is now estimated at around €20bn a year, and on top of that there are huge new investment requirements

The end of 2013 saw a re-organisation of infrastructural priority projects accompanied by a new financial instrument within the EU’s 2014-2020 budget named the “Connecting Europe Facility”. Over €32bn, which includes €10bn from the EU’s cohesion fund, will cover energy and telecommunications infrastructure as well as transport, with the latter expected to benefit from €26.3bn of EU co-financing.

The EU’s new transport infrastructure guidelines pay special attention to high-speed and high-capacity rail, and aim at an EU-wide multimodal and interoperable “core network” by 2030. It is to consist of nine “Corridors” that are to increase efficiency and speed up both passenger and freight services. They will also promote links been rail, airports and sea ports.

So much for the EU’s ambitions. There remains, however, a huge divide between Europe’s infrastructural needs, which so far are mainly dependent on public funding, and ways of closing the gap. The resources of the Connecting Europe Facility (CEF) are quite modest when compared to Europe’s needs. The CEF’s call for proposals that closed this year at the end of February with available funding of €12bn was oversubscribed by more than three times. The European Fund for Strategic Investments, best known as the “Juncker Plan”, may be able to support those projects that the market is ready to undertake, like motorways, airports or the more efficient ports, but important projects like alpine tunnels, will still have to rely on public sector support.

It is still too soon to assess the Juncker Plan, but comparing it with other approaches can be interesting. In the U.S., one of the key pillars of the Obama Administration’s counter-cyclical strategy consisted of raising more than $100bn to provide federal support amounting on average to 35% to state and local infrastructure investment. In all, the U.S. government’s effort was equal in size to the Juncker Plan’s target of around €315bn. The latter, though, mainly provides leverage and guarantee instruments out of the EU budget to mobilise private capital rather than the fresh money that was the case in the United States. So far, European Institutions have not been allowed to raise money in the capital markets when earmarked for specific purposes like project financing.

Europe’s main problem will be attracting private capital to finance infrastructure through public-private partnerships (PPPs). Good examples of this sort of partial financing are important projects like France’s high-speed Tours-Bordeaux railway link and the Oresund link between Denmark and Sweden, and it is hoped these will be followed by many more. Some existing European financial instruments like project bonds, the loan guarantee instrument for trans-European transport projects, or the Marguerite Fund offer incentives for private capital to become involved, but so far their track-record is rather modest. But in these times when liquidity is abundant and so many institutional investors are looking for long-term opportunities, it should be possible in theory to attract the private sectors. The conditions for doing so need to be carefully analysed, and have much to do with the quality of projects, procurement procedures and the regulatory context in which financial institutions have to operate – Basel III for banks and Solvency II for insurance companies. Some of these pre-requisites play quite a different role in the case of private rather than public funding.

A good many infrastructure projects can be seen as “public goods” that produce long-term economic benefits that rarely have a price in the market, and consequently rely mainly on public financing; in other words, are typical cases of “market failure” that call for public intervention. But when private financing is to be involved, that calls for a better identification of the positive overall economic benefits. Unlike with public funding, when private capital investment in a project produces such benefits as less pollution, less congestion and fewer accidents there must be an appropriate financial return for the investor. An interesting example of this problem is the EU’s Emissions Trading Scheme on greenhouse gasses, which applies to air transport but not to rail.

Rather than seek private sector partners, EU’s national governments struggle with their public finances

Other possible financial sources could be a better use of both the “user pays principle” and the “polluter pays principle”. Interesting examples are the tolling system for freight in Germany, and more generally the Swiss Alp transit scheme. Cross-financing, as in the case of the Brenner Base Tunnel for rail which is partly financed by the existing motorway, could also provide financial support for some projects, because they are in some sense an extension of the polluter pays principle.

A much more active role for private funds is not only desirable but very necessary, but many of the EU’s national governments still seem reluctant to encourage this. Rather than seek private sector partners, they struggle with their public finances. Whenever there are budget problems, infrastructure spending is at best rescheduled if it isn’t cancelled. When funds are made available, they are often quite modest, witness the €10bn two-year package in Germany to cover federal as well as local projects. EU governments continue to be very reluctant to take on more debt for infrastructural development, even though borrowing conditions are at present very favourable.

Another problem is the way PPPs are treated by the current Eurostat rules concerning the calculation of overall public debt in relation to the eurozone’s Growth and Stability Pact. Without re-opening the debate on the “golden rule”, a more favourable treatment of investment spending, especially when compared to current consumption, for projects being scrutinised at both national and European levels would seem to make a lot of sense.

A major debate is needed on all these issues. If we fail to address these problems and resolve them, Europe’s transport infrastructure will soon start to fall apart. If that happens, a severe blow will be delivered to our hopes of economic recovery in a Europe that is becoming the “old continent” in so many senses.

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