ROMANIA'S TRANSPORTATION INFRASTRUCTURE: TAKING THE SLOW

UNCLAS SECTION 01 OF 03 BUCHAREST 000796

STATE FOR EUR/CE: ASCHIEBE

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ELNT EAIR EWWT EINV PGOV RO
SUBJECT: ROMANIA'S TRANSPORTATION INFRASTRUCTURE: TAKING THE SLOW
ROAD

Sensitive but Unclassified; not for Internet distribution.

SUMMARY


1. (SBU) While the Government of Romania (GOR) is painfully aware
how large a problem Romania's inadequate infrastructure presents for
sustaining future growth, improvements will be slow in coming.
Project financing and management constraints continue to impede
progress, with signs emerging that the country's decrepit,
over-taxed road network is already becoming a hindrance to foreign
investment. Political and business leaders alike hope that upcoming
parliamentary elections will produce a renewed political consensus
to press forward on what are admittedly very ambitious plans: 2,000
kilometers of new motorway by 2015, increased rail capacity,
construction of a new airport in Bucharest, and improved transit on
the Danube River. Romania's continued integration with the European
Union can only proceed as quickly as development of these new road,
rail, air, and water links will allow. End Summary.

"WE SHOULD HAVE STARTED TEN YEARS AGO"


2. (SBU) In an October 2 meeting with EconOffs, Ministry of
Transport (MOT) State Secretary Barna Tanczos sketched out the GOR's
ambitious plans -- some of which have been on the books for years --
for expanding Romania's outdated transport infrastructure. Tanczos
admitted that Romania has moved much more slowly than some other
countries in Eastern Europe, and is only now getting serious about
projects "which we should have started ten years ago." Romania's
rapid economic growth in recent years has overwhelmed the road
network and magnified the disruptions caused by new construction on
existing routes for which motorists have few alternatives. Tanczos
was candid about constraints on MOT's capacity to fund and oversee
so many projects, but insisted that Romania is making incremental
forward progress.

BEATEN UP OVER BECHTEL


3. (SBU) When asked about Romania's single largest public works
project -- the 400 kilometer, multi-billion euro Transylvania
Motorway, being built by Bechtel -- Tanczos affirmed that Bechtel is
meeting its contractual obligations and the Motorway is making
visible progress, despite a steady stream of negative reporting in
the Romanian press about its costs. When asked why the GOR was not
more active in publicly defending the project from these constant
attacks, Tanczos sounded the now-familiar (and somewhat
disingenuous) complaint that the contract is an imperfect and
disadvantageous one for the Government. Still, the GOR is
determined to move forward even with an "imperfect deal" rather than
risk the years-long delays that would result from re-tendering the
project.


4. (SBU) At the same time, Tanczos admitted that one of Bechtel's
consistent complaints, that of late payments and inadequate
financing for the Motorway, is likely to continue. The EU will not
allow Romania to use EU structural funds for such a major project
built by a U.S. contractor, he lamented. At the same time, external
financing of any kind became more difficult after the Ministry of
Economy and Finance (MEF) adopted new regulations in 2007
prohibiting other ministries from securing their own external
financing. This must now be processed through MEF itself and the
Ministry has refused to approve financing for the Motorway. The
result is a painfully slow, pay-as-you-go construction scheme that
must be supported out of current revenues, rather than completing
the project more quickly through up-front financing and then
spreading the cost out over 20-30 years. MOT is unable to guarantee
a steady funding stream from MEF out of the central budget, where
the Motorway must compete annually with the full range of GOR
priorities.


5. (SBU) While Bechtel will be fully paid for 2008, Tanczos would
make no promises regarding 2009, as there may be a very different
post-election political landscape next year. (Comment: Of course,
new leadership at both MEF and MOT could also be less stingy about
financing for the Motorway. This may be particularly true if the
Social Democrats, or PSD, come to power, as it was the former
PSD-led government which awarded the original contract to Bechtel in

2004. End comment.) Responding to Bechtel's criticism that the GOR
has been slow to expropriate land in the Motorway's path, Barna said
Bechtel itself was partly at fault for making late changes in the
route. However, frequent legal challenges by landowners over title
issues and compensation values are also to blame; Tanczos expressed
hope that some changes to the expropriation law recently passed by
Parliament would speed up the process.

MONEY CHALLENGES COMPOUNDED BY MANAGEMENT WOES


6. (SBU) Tanczos insisted that road building is MOT's highest

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priority, and the Transylvania Motorway to the Hungarian border is
just one of multiple projects on the drawing boards. If these are
to succeed, the GOR must take better advantage of both EU structural
funds and financing from international lending institutions, Tanczos
explained. This would allow the GOR to initiate projects with as
little as 25 percent of the up-front cost coming out of its own
coffers, putting much less strain on the annual budget. The GOR is
also attracted to turnkey deals under which contractors would build
and operate toll highways through long-term concessions. This
tactic will be used on several segments of the long-awaited
expressway between Bucharest and Brasov, on which preliminary work
began this year. Other priorities include the "European Corridor 4"
linking Arad, Timisoara, and Sibiu with Hungary, and a toll highway
connecting northern TransylvaniQto Iasi.


7. (SBU) Asked about the GOR's genuine ability to pursue all these
projects in the next few years, however, Tanczos confessed that
official timelines for completion are wildly optimistic. Beyond
questions of funding, a major culprit is MOT's struggle to recruit
and retain qualified contract managers and project engineers, which
are in strong demand in Romania's booming economy. Many MOT experts
have jumped to the private sector and the Ministry needs a number of
new, qualified personnel simply to keep already-initiated road
projects on track, he said. Without them, MOT's capacity to manage
projects of this magnitude is sorely compromised even if money is
plentiful.

TRAINS, PLANES, AND BOATS


8. (SBU) Tanczos said MOT is focused on resolving the even more
serious management and personnel problems which exist within the
railroad network, badly neglected in the post-communist era. A key
goal is to rehabilitate the dilapidated track system to support more
freight trains so that more cargo currently moved by truck can be
taken off congested roads. MOT is also considering asking Germany
and Austria for help in completing a feasibility study for a
high-speed passenger rail link from Bucharest to Budapest and on to
Vienna.


9. (SBU) Bucharest's main international airport, Otopeni, is one of
the few in Europe not connected by rail to the city it serves, and
can currently be accessed only by car or bus along one of
Bucharest's most congested thoroughfares. According to Tanczos, one
possibility under study is to rehabilitate an existing rail line
close to the airport and build a station for commuter trains from
downtown. This would be much faster and cheaper than the planned 1
billion euro extension of the Bucharest subway system out to the
airport, unlikely before 2020. (Comment: Japanese diplomats tell
post that Japan had concluded a deal with the previous PSD
government to assist with construction of a high-speed rail link to
Otopeni, but this deal was discarded when the Liberal PNL government
came to power and has not been revisited. End comment.) In terms
of airport infrastructure, Otopeni will be gradually expanded and
the close-in Baneasa Airport, which currently serves low-cost,
charter, and general aviation flights, will likely be closed.
Building a new airport to the south of Bucharest has also been
mentioned, though Tanczos confessed this is a distant prospect and
that improved road and rail access to the existing airport may be a
better idea.


10. (SBU) With a rising chorus of complaints from businesses that
they can no longer ship their products adequately on existing roads,
Tanczos said that a real possibility exists to make better use of
the Danube River for moving cargo. Environmental NGOs are currently
blocking a project to increase navigability on the Romanian portion
of the Danube over concerns about potential harm to vulnerable
sturgeon populations. Tanczos is hopeful that the GOR can reach a
compromise with the NGOs to allow a series of smaller projects,
coupled with extensive monitoring, to move forward.

COMMENT


11. (SBU) No matter what the outcome of November parliamentary
elections, politicians and business leaders in Romania appear to
share a broad consensus that improving transportation infrastructure
must remain a priority. The American Chamber of Commerce has
flagged this issue as a major concern for future economic growth and
for Romania's ability to continue to attract foreign investment. As
Bechtel's experience here has shown, however, persistent GOR funding
and management constraints can prove perilous even for projects
already under contract, not to mention those still in the planning
stages. Because of this, the widely heralded promise of plentiful
EU money to fix Romania's infrastructure remains largely unfulfilled
nearly two years after Romania's EU accession. There are more
flights to Frankfurt and Brussels now, but for the Bucharest trucker
facing a two-day crawl to the Hungarian border along twisting,
crumbling, congested two-lane roads, the rest of Europe still seems

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far away indeed. End Comment.

TAUBMAN