Brussels, 3 May 1999 CENTRE FOR EUROPEAN POLICY STUDIES A System for Post-War South-East Europe (Plan for Reconstruction, Openness, Development and Integration (Working Document of the Centre for European Policy Studies by Michael Emerson, with Daniel Gros, Wolfgang Hager, Peter Ludlow and Nicholas Whyte, prepared within the framework of its Working Party on "The Future of South-East Europe" (Co-Chairmen Erhard Busek and Panagiotis Roumeliotis). SECTION 2.2 Reconstruction and investment Infrastructure. The Pan-European Transport Networks and Corridors are well advanced in their design and planning for the needs of South-East Europe. Some of the region's transport axes are subject to steady investment, but mainly those which link the accession candidate countries, and here the European Investment Bank is a major player. The new post-war situation will have two key issues: - inclusion or not of Serbia in the integration process, with Belgrade being geographically a natural strategic point on the road, rail and river axes. - if Serbia joins the integration process there will also be reconstruction financing, especially for fundamental infrastructure and investments (bridges, power stations). The importance of Yugoslavia as a transit country has been illustrated by the extent of disruption of trade and economic activity in affected countries, ranging from Austria and Hungary through to Bulgaria and Romania. A reconstruction effort which excluded or even avoided Yugoslavia would be very expensive indeed, and hold back productive economic expansion for many years. IMPORTANT DECISIONS ON THE LOCATION OF NEW OIL AND GAS PIPELINES FROM CIS COUNTRIES, WHICH WOULD PASS THROUGH THE REGION, CAN ONLY BE TAKEN IN THE POST-WAR CONTEXT OF INCREASING INTEGRATION WITH THE EU. FINANCING WOULD BE OBTAINED FROM THE EIB AND IFIS. SAFE AND CHEAP SUPPLIES OF HYDROCARBONS WOULD IN TURN FACILITATE INVESTMENT IN NEW AND EFFICIENT NON-NUCLEAR POWER STATIONS. As regards total investment in public infrastructure - transport and environment - a target figure of 8% of pre-war GNP (3 billion euro for the "5") would not be unreasonable, given a decade of neglect in many countries, and now war damage in some of them. This figure must be seen in the context of a desirable level of investment of 25% of GNP in any realistic catch-up scenario. The region as a whole may be assessed in three categories. First are the countries for which pre-accession financing is already available and post-accession aid can be planned: Bulgaria, Romania and Slovenia. The cost of upgrading the road system of these three countries (major corridors) has been estimated at 12 billion euro; with expenditure for rail of about 7 billion euro. Two thirds of these amount are for the Pan-European Corridors. But clearly, in a new post-war situation with Serbia joining European integration, the alignment of present corridors would need to be considered, especially Corridor No 4 which avoids Serbia. A tentative Corridor No 4a, the historical route through Belgrade, has already been pencilled into the Pan-European Corridors. A second group consists of Croatia, Bosnia, FYR Macedonia and Albania. Bosnia apart, their only source of infrastruture funding has been through the IFIs and on a modest scale. Substantial aid flows to FYR Macedonia and Albania are now indicated politically. Economically, Croatia has considerable absorption capacity, including a coastal highway serving the tourism sector and port upgrading to ease the integation of the region into the European economy. A total of 5 billion euro over a ten year period would have a major impact on the economy of this group. Thirdly are the three parts of FR Yugoslavia, Kosovo, Montenegro and Serbia. The first two have suffered loss of relatively minor bridges (unit price about 10 million euro). The Montenegran port of Bar will gain strategic importance in a EU-integrated Balkans, with branches to Kosovo from the present Bar-Belgrade corridor clearly a priority. More generally, an immediate upgrading of road and rail infrastruture in Kosovo will be needed to support the civil reconstruction programme with its heavy transport demands. Finally, in Serbia major bridges across the Danube will have to be renewed (30 million euro unit price), as well as a great deal of other basic infrastructures. An immediate allocation of about 1 billion euro would need to be made for the transition back to normality. Management issues. The scale of the task of reconstruction and development in the regions raises issues of management capacity. The EU has two executive functions with demonstrated capacity to disburse enormous investment funds in an apparently acceptable manner with quite lean staff structures: the European investment bank, which disburses 25 billion euro of loans per year, and the Directorate-General XVI of the Commission, which disburses about 30 billion euro per year of grants on account of the Structural and Cohesion Funds. On the other hand the Directorate-General IA for external relations has had difficulty in building up its executive capacity to disburse the PHARE and TACIS programmes, partly because it has not been granted adequate staff resources promptly enough, partly because of extremely burdensome financial and management procedures. For reconstruction and investment in the "5" there would need to be innovations in management structures. The model of the Structural Funds, while itself functioning satisfactorily, is not appropriate because it depends upon reliable partnerships with the national and regional administrations of EU Member States. The present Director-General, Eneko Landaburu, may be quoted as saying: "the system works reasonably, but in the case of Greece it took ten years of experience of joint programming and project management before our partners were meeting EU standards". This example suffices to say that a completely different model is needed for the "5". One proposal is that a new South-east European Agency for Reconstruction and Development (SEARD) be created, as subsidiary of the European Investment Bank. A new agency is warrranted by the intensity of the reconstruction and investment effort needed in an area with particular conditions. Basically there has to be a double solution in one package: finance and sound governance (i.e. cutting out corruption). The latter will call for much hands-on management with good local knowledge, but also by way of control and ownership of projects. For economic infrastructure projects the idea would be for SEARD to have property rights in bridges and other suitable assets, and would thus be able to secure its own investments and better able to attract third party private finance. The link with the European Investment Bank is also highly desirable, in view of the enormous size of the EIB's financial reserves and borrowing capacity. As soon as SEARD demonstrated a capacity for effective operations, its funding could be built up rapidly. By comparison the EBRD still has only limited financial capacity, and has to absorb for the time being extremely difficult operating conditions in CIS countries, following the Russian financial crisis. However the EBRD could be extremely valuable in building up its role as active shareholder in private enterprises of the region, including new ones which replace those destroyed in the present conflict. EBRD would here be a leading actor for improving corporate governance in the region, adding a further instrument for a comprehensive anti-corruption and anti-crony capitalism strategy. (The full paper is available in Acrobat format at http://www.ceps.be/SEEKOS4B.PDF. ) Louis Proyect (http://www.panix.com/~lnp3/marxism.html)
