5 Feb, 2012

Europe Needs 1.5 Trillion Euros To Upgrade Transport Networks by 2030; Bonds, User Charges Coming

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Text of speech (as prepared for delivery) by Siim Kallas, Vice-President and European Commissioner for Transport on “Transport Financing: The Way Ahead” at the European Policy Centre Brussels, 2 February 2012

Europe needs to invest heavily in transport infrastructure before 2050 to remain competitive. At the moment, Europe is going through difficult economic times. There is a strong and understandable focus on tackling budget deficits and most EU Member States are implementing austerity measures. While this is important, it is not the only way to regain market confidence. Reviving growth must be part of the solution. And for this, transport’s role is crucial.

If it does not flow or connect smoothly, then our economy will fail to grow. We must invest if we are serious about turning the dream of a single European transport area into a reality, if we are serious about connecting east with west, and removing the many bottlenecks that prevent smooth traffic and trade flows. We cannot do things in the old way. This simply will not work. Maintaining the status quo simply means keeping a transport patchwork that takes us nowhere.

So a top priority is to complete the trans-European transport network. This will be crucial for creating employment and economic growth. The trans-European transport network (TEN-T) and the financing proposed for transport for the EU’s next budget period are clearly not a European ‘New Deal’ to end Europe’s economic crisis. However, having modern and efficient infrastructure will go a long way towards driving medium-term growth.

Investment will allow us to relieve congestion and build the essential missing links. This is especially important given the forecast extra demand for mobility. In addition, major parts of our transport infrastructure are aging fast. It is also needed to make transport greener so the sector properly plays its part in meeting the EU’s ambitious targets for cutting greenhouse gas emissions. We’re looking at several ways of doing that, by investing in research and development of innovative technologies – our rail traffic management system, for example, or the SESAR programme, to make the Single European Sky a reality.

More innovation and ‘smart’ technology are key if Europe is to stay competitive. But building and maintaining infrastructure is an expensive exercise. We estimate that developing the infrastructure to match rising transport demand will cost 1.5 trillion euros up to 2030. Just up to 2020, we will need about 500 billion euros to complete the TEN-T. Of that, around half is needed to get rid of the main bottlenecks.

Already with TEN-T, every million euros of public money that we spend generates 5 million in investment from the Member States. And every million euros generates 20 million from the private sector. But despite the impressive leverage rates, the funds available will not be enough.

To build the transport network that Europe needs, will require a competitive environment and long-term funding. The public purse has its limit, both here in Brussels and in the Member States. This is why it also needs the private sector: the most viable and reliable longer-term source of investment.

The Connecting Europe Facility (CEF) – the financing instrument proposed by the Commission for the EU’s next budget period, 2014 to 2020 to invest in transport, energy and ICT infrastructures – will be essential to ensure that important European infrastructure investments will happen. It is also designed to attract and guarantee private sector involvement.

The CEF is the best example of European ‘added value’ that the EU budget can, and must, deliver. It puts EU resources into projects that are important for the whole of Europe. This is not always easy. Local people on the ground quite rightly want connections that work for them. But we have to ensure that that those connections come from somewhere and go to somewhere, that they link up to a European network. That is Europe’s added value.

I am happy to say that the lion’s share of CEF funding is proposed for transport – 21.7 billion euros plus another 10 billion for core network transport projects coming from the Cohesion Fund. This may seem a significant increase compared with current funding but it is still only a fraction of overall transport sector financing needs.

In fact, this is a conservative proposal because it identifies the minimum amount needed to make the trans-European transport network a reality. Most of this money will head towards pre-identified projects that are the most important for completing the trans-European transport network, particularly the core network corridors and other significant cross-border sections.

Ladies and gentlemen,

I would also like to say a few words on the 10 billion euros earmarked in the Cohesion Fund since there are questions about why part of the CEF money comes from a separate budget line. This was done to ensure that east gets better connected to west and that important connections also happen within and between the Cohesion Fund eligible Member States.

Firstly, I should stress that this 10 billion is only available for the Cohesion Fund eligible Member States. And it comes with the same high co-financing rates as the rest of the Cohesion Fund – up to 85%. The co-financing rates for current TEN-T programme, and for the 21.7 billion euros of CEF transport money in line with this, range between 20% and a maximum of 50%. All Member States are eligible to apply for this funding.

So I am surprised that the most critical voices about this 10 billion come from the Cohesion Fund eligible countries themselves. This separate budget line was established for their benefit: to help them to overcome difficulties delivering complex cross-border rail projects and to ensure they can finance those important projects with the same high co-financing rate which they are used to having; to help them to start thinking European, to help them to make good use of EU budget money.

Just one example to illustrate this: at the beginning of 2010, Member States had allocated 22.5% of Cohesion Policy funds available for rail projects while the TEN-T programme’s allocation rate for rail projects in EU-12 was 74%. The overall TEN-T programme commitment rate in mid-2010 was 98%!

The CEF is also a flexible instrument that combines market-based instruments and directs EU support to optimise the financing’s impact. It also aims to make transport a solid and attractive opportunity for private capital, particularly for specialised infrastructure investors.

We are confident that the strong track record in EU funding for transport projects, working together with valued partner institutions like the European Investment Bank, will help generate some impressive leverage on this money. Based on that combined amount of €31.7 billion, we estimate that the expected leverage and co-funding could raise total transport investments to between €140 and €150 billion.

But even so, we will need more private sector involvement to make up the shortfall. How best to attract that investment?

Let me briefly outline our plans for project bonds, one of a number of risk-sharing instruments available under the proposed Connecting Europe Facility. With project bonds, the aim is not only to revive market appetite for infrastructure investment. It is also to help promoters of individual infrastructure projects attract long-term private sector debt financing.

Our initiative will reduce the risk for investors looking for long-term investment opportunities, as well as give infrastructure projects credibility. For this, our natural partner is the European Investment Bank, which can offer attractive pricing terms and large loan amounts over long maturities. The EIB’s role is not one of a traditional insurance guarantee but rather one of adding reputation and track record in dealing with project risk.

EIB involvement in any project is seen as a strong guarantee for commercial banks when they decide to finance parts of a public-private partnership, for example. And since a large share of the bank’s lending has traditionally focused on transport, it already has a wealth of experience in investing in the sector. The initiative builds on other innovative financing instruments which the EU successfully operates with the EIB, such as the loan guarantee instrument for trans-European transport networks. Since EU budget contributions will be strictly capped, there is no extra liability or risk to public coffers beyond the amounts initially committed.

We are also looking at preciser and smarter infrastructure charging rules to raise revenue. I am thinking here of road tolling schemes and the Eurovignette system for charging heavy goods vehicles, for example. These would at least reflect the maintenance costs of infrastructure, congestion, air and noise pollution – for which transport users and polluters should be paying.

Let me stress again: transport is a true engine driving European growth. Every European company and citizen depends on an efficient transport system.

With the economic crisis, Europe needs – more than ever – to improve its mobility. So we must invest in a sustainable transport network. This requires long-term funding and commitments from governments – and not only to attract private funding. Conditions for infrastructure investments must be stable for long periods, perhaps 30 years. That’s where we in Brussels can help, by creating an environment of business security. And the proposed Connecting Europe Facility is an important part of that.