CONCEPT PAPER Accelerating Infrastructure Preparation in ...€¦ · surveying, permitting).1...

a

CONCEPT PAPER

Accelerating Infrastructure Preparation in Southeast Europe

Roland Berger GmbH

Heiko Ammermann, Yvonne Ruf, Markus Kaufmann, Jan Heinze

January 2017

2 CONCEPT PAPER


Executive Summary

There is a considerable need for infrastructure investments in Southeast Europe in the

coming years and efforts to prepare projects are being made: Governments have defined their

infrastructure priorities, the EU Commission and regional multilateral bodies are supporting and

monitoring infrastructure preparation, development banks offer financial instruments for project

finance, private finance seeking reliable returns is largely available and donor organizations provide

funding for technical studies.

Despite these efforts, progress on infrastructure delivery in the region still lags behind. We

see two key hurdles that slow down implementation:

1. Project bankability: Many projects are delayed due to unclear commercial viability or financing risks which public banks and financial market actors do not absorb.

2. Capacity gap: Organizational capacities on the public project developers' side to prepare and bring projects to the bankability stage are limited.

While hurdle 1 is being addressed in other studies (e.g. Roland Berger Study on Cost-Effective

Financing Structures for Mature Projects of Common Interest (PCIs) in Energy), this paper

explores the capacity gap and introduces an innovative approach to closing it.

It is not primarily a lack of financing that slows down projects, but rather a lack of capacities

to prepare projects that would attract adequate amounts of public funding and private

finance, as our discussions with public project developers, banks, donor organizations and our

project experience in the region have shown. While there often are technically focused feasibility

studies available and financing for bankable projects is obtainable, the lack of capacities on the

project developers' side slows down projects. This most critically concerns skills to design and

validate studies, ensure alignment with national policy objectives, de-risk the business case,

establish the legal and regulatory framework, design a sustainable public-private partnership model,

structure project financing and interact with investors.

Capacity development is a key success factor to de-bottleneck the phase between feasibility

and financing. We suggest an innovative approach that systematically develops technical,

managerial and functional skills for infrastructure development and enables the beneficiaries to

directly apply the acquired skills while working in an integrated team with experts to promote a

specific infrastructure project. The skills development plan is directly linked to the phases of project

preparation and the required tasks that need to be performed to prepare the project. This approach

goes beyond providing technical assistance as the involved experts deliver technical advice (incl.

studies, etc.) while directly involving the project owners and developing their skills. The objective is

to transfer know-how for infrastructure project preparation that can be applied in other large

investment projects in the involved countries.

More support for capacity building accelerates infrastructure development and increases

regional ownership as well as the effectiveness and efficiency of public funding. While there

are numerous support programs and facilities available to contribute to the feasibility stage, there is

much less support available to develop capacities for managing infrastructure projects in the critical

planning and financing stage. De-bottlenecking this stage would not only accelerate implementation

but also increase the efficiency of public funding as project preparation time would be reduced,

feasibility studies could be streamlined and processed faster and the amount of grants required for

project implementation could be reduced due to improved financial engineering and de-risking.

3 CONCEPT PAPER


Table of Contents

Executive Summary ......................................................................................................................... 2

1. Introduction – Progress on infrastructure delivery in Southeast Europe is lagging behind........... 4

2. Challenges – The lack of organizational capacity is a significant bottleneck ................................ 7

3. Concept – Capacity development should transfer skills while realizing projects ........................ 10

4. Outlook – Governments and donors should work together to close the capacity gap ................ 13

5. Contacts ...................................................................................................................................... 14

4 CONCEPT PAPER


1. Introduction – Progress on infrastructure delivery in Southeast Europe is lagging behind

In the coming years, large amounts of investment in energy, transport and broadband

network infrastructure are required in Europe. The European Investment Bank (EIB) estimates

that the EU may need up to EUR 2 trillion in investments in the period up to 2020. Investment needs

generally tend to be high in peripheral EU member states as well as EU neighboring states. Looking

at the energy sector for example, the European Commission has compiled a long list of 195 PCIs in

energy in the EU and Instrument for Pre-Accession Assistance (IPA) countries. Many PCIs are

located in these countries (see figure 1 below for examples of investment needs in PCI projects)

and the respective public project developers often face very challenging tasks as the projects tend

to be larger and more complex than their usual projects.

Figure 1 – PCI intensity – Geographic distribution of the 195 PCIs, 10 PECIs and 10 PMIs across Europe

Sources: Regulation (EU) No 2016/89 amending Regulation (EU) No 347/2013; Attachment Recommendation of the

Ministerial Council, Recommendation No. 2016/../MC-EnC of 14 October 2016; Roland Berger

Support for project development is available from donors, multilateral banks and regional

facilities, mostly in four forms: grants, public financing, technical assistance, as well as support in

cross-border coordination and alignment, for example:

> The EU Commission has set up comprehensive support programs to accelerate infrastructure

development and increase connectivity, e.g. the Connecting Europe Facility budget for 2014-

1No of PCIs per million inhabitants v2 Dec 15.pptx

Geographic distribution of the 195 PCIs, 10 PECIs and 10 PMIs across Europe

PCI, PECI and PMI per 1,000,000 inhabitants

≤ 1.00 (19) ≤ 2.00 (10)

≤ 10.00 PCIs per 1m inhabitants, 10 PECI/PMI

Source: Regulation (EU) No 2016/89 amending Regulation (EU) No 347/2013; Attachment Recommendation of the Ministerial Council

Recommendation No. 2016/../MC-EnC of 14 October 2016; Roland Berger

Very strong energy project exposure


Strong energy project exposure


Moderate energy project exposure

5 CONCEPT PAPER


2020 is now EUR 30.4 billion (EUR 24.1 bn for transport, EUR 5.35 bn for energy and EUR 1

bn for telecommunications).

> International financing institutions (IFIs) such as the EBRD, the World Bank, the EIB as well as

national development banks offer public financing instruments for commercially viable and,

thus, bankable projects.

> Regional donor supported facilities such as the Western Balkans Investment Framework or

other EU supported infrastructure facilities offer technical assistance to produce necessary

project documentation, e.g. feasibility studies.

> Multilateral bodies, such as the South East Europe Transport Observatory (SEETO) and the

Energy Community support and monitor infrastructure project preparation and actively develop

the EU neighbors' transport and energy infrastructure together with the respective

governments.

Furthermore, regionally targeted initiatives, such as the Connectivity Agenda and the Western

Balkan Conferences have been advanced to accelerate infrastructure projects in the region.

Summits

Critical achievements

Paris Balkans Summit 2016 EU co-financed almost EUR 100 m for three new railway projects, in addition to financing from IFIs and WB national budgets. Progress on implementation of "soft measures" presented

Western Balkans Summit Vienna 2015 EU provided the first EUR 200 m for 10 priority projects, mainly in transport and power transmission interconnectors

2014 Conference of Western Balkan States, Berlin

Decision taken to provide a framework for the next four years and to meet annually for the following four years to support integration of the Western Balkan states

Despite the efforts, a large number of infrastructure projects are delayed compared to the

originally planned commissioning date. For example, the 2015 PCI progress report issued by the

Agency for the Cooperation of Energy Regulators (ACER) revealed significant delays, finding that

"slightly more than half of the PCIs are behind the original schedule as planned in 2012/2013".

Officials in national ministries as well as international organizations confirm that it frequently takes

up to 5 years from feasibility until the beginning of construction.

We see a capacity gap on the public project developers' side that poses hurdles for

infrastructure project delivery. There is a bottleneck at the crucial stage-gate between technically

focused validation of feasibility and financing decision. Despite numerous existing project studies,

reaching the bankability stage is a challenge.

6 CONCEPT PAPER


We see two key hurdles here:

1. Project bankability: Many projects are delayed due to unclear commercial viability or risks which public banks and financial market actors do not absorb. Hence, obtaining financing is difficult.

2. Capacity gap: Organizational capacities on the public project developers' side to prepare and bring projects to the bankability stage are limited.

Hurdle 1 and ways to overcoming it are being discussed in other reports and studies (e.g. Roland

Berger Study on Cost-Effective Financing Structures for Mature PCIs in Energy).

This paper aims at better understanding the capacity gap and introducing an innovative

approach to develop the organizational capacities needed on the level of the public project

developers, e.g. ministries, transmission system operators (TSOs) and government transport

authorities or agencies. We argue that it is not primarily a lack of funding, but a lack of capacities to

prepare projects that would attract adequate amounts of public funding and private finance that

slows down infrastructure projects. Furthermore, donor-funded support programs are largely geared

to producing studies or securing project finance, rather than to capacity development for the crucial

planning and de-risking phase. Capacity development increases the management capacity of the

project developers, fosters regional ownership, and greatly increases the efficiency and

effectiveness of ongoing public funding for infrastructure in the region. Our insights stem from

interviews with numerous public project developers (ministries, government agencies, transmission

system operators and transport organizations, etc.), banks, donors and regional organizations.

Furthermore, our learnings from projects in the region are reflected.

The learnings in the paper are relevant for all public (or quasi-public) infrastructure

developers in the region. The authors are fully aware that the challenges of preparing bankable

projects vary for infrastructure projects in different sectors, e.g. transport, energy or digital. In

energy, falling energy prices have been one of the greatest recent challenges as they reduce

commercial feasibility and decrease the internal rate of return for investors. In transport projects,

financing can be very challenging as it more often depends on the state budget, e.g. where there is

no revenue model. However, we find the learnings on the capacity gap and the capacity

development approach to be generally very viable for project developers in all sectors. Naturally,

the general approach we introduce would need to be tailored to the specific role, challenges and

capacity needs of the respective institution as well as their specific infrastructure projects.

7 CONCEPT PAPER


2. Challenges – The lack of organizational capacity is a significant bottleneck

The lack of organizational capacities is perceived as one of the greatest bottlenecks for

infrastructure development in the region. From the discussions with project developers (e.g.

national ministries, electricity and gas transmission system operators, transport authorities), and

intergovernmental organizations, the following reasons for delay appear most acute (in descending

order): lack of public sector capacities to manage project implementation end-to-end, lack of

financing, viability of business cases, legal and regulatory issues, difficulties in securing right of way

and/or land acquisition, contractor performance issues, environmental and social impact

assessment (ESIA) and permitting hurdles, technical difficulties and project complexity.

The lack of capacity is most apparent in areas where infrastructure management skills are

required. When asked about the precise stage in the project lifecycle at which the capacity gap is

most acute and hence creates obstacles for swift project delivery, stakeholders most often point to

the following (in descending order): obtaining financing, project set-up and de-risking, project

definition and concept, detailed design and construction, as well as development (engineering,

surveying, permitting).1 Sector development strategy and project identification as well as feasibility

studies, technical and commercial validation appear to be less of a challenge, suggesting that

inherent capacities and/or international support at these stages are available to a certain extent.

Officials frequently point to a lack of qualitative human resources (i.e. individual technical

and managerial capacities) as well as the overall professionalization and de-politicization of the

civil service. Staffing in mere numbers is less of an issue, so are systems, IT, etc. The skills sets

that are missing comprise both technical and managerial elements: (1) commercial, engineering

and environmental know-how to challenge and validate feasibility studies (also commercial

evaluation capacities), (2) financing know-how, donor and IFI relations, and (3) project

implementation know-how. Technical capacities regarding tendering processes and investor

handling are often insufficient as well. However, levels of expertise in policy formulation, sector

strategy development, needs assessments as well as sector-specific technical know-how (road, rail,

ports, electricity, gas, etc.) are considered to be higher, both by the donor community and the

developers themselves.

Regarding managerial skills, stakeholders commonly point to alignment and coordinating

capacities of various kinds as being most critical and lacking, i.e. within the ministry/developer,

across ministries or other government entities as well as with other countries. In terms of cross-

border collaboration, the most relevant obstacles appear to stem from different

legislation/regulation, whereas joint work at the technical level actually progresses quite well. For

example, this is also reflected by the intensified cross-border cooperation in the transport sector of

Western Balkan countries aiming at harmonizing the regulatory framework and standards (so called

"soft measures") to increase connectivity.

1 Nine stages have been considered (front-to-end): (1) sector development strategy and project

identification, (2) project definition and concept, (3) feasibility studies, technical and commercial

validation, (4) project set-up and de-risking, (5) obtaining financing, (6) development (engineering,

surveying, permitting), (7) detailed design and construction, (8) commissioning, (9) operations.

8 CONCEPT PAPER


The capacity gap spans all levels of hierarchy. Finally, when asked at which level in the

organization the capacity needs are most acute, most of our interviewees did not make significant

distinctions between heads of departments, heads of teams or the working level.

In summary, there exists an organizational capacity constraint to maturing infrastructure

projects and bringing them from feasibility to a bankability stage, including preparing and

validating commercial as well as technical project proposals, adapting the legislative framework,

permitting, preparing the administrative preconditions, structuring financing models, defining public-

private partnership models, negotiating with investors and/or financiers, etc. The capacity gap

includes technical and managerial know-how and it is most apparent in the stage between

preparation (incl. feasibility) and the final investment decision. Hence, the actual bottleneck is

currently not so much a lack of funding but rather a lack of capabilities on the developers' side.

Figure 2 – Infrastructure development phases and identified capacity gaps (schematic)

The lack of capacity not only slows down project implementation, it also results in a lack of

true regional ownership and puts the effectiveness and efficiency of public funding at risk.

Often, a large number of donor-funded technically very detailed studies on the feasibility of

infrastructure projects are available. Sometimes, the level of technical detail in such studies well

exceeds the level of analysis validating commercial feasibility in the first place. Furthermore, some

international investors bring forward high-level unsolicited proposals to national ministries/agencies,

suggesting the implementation and often financing of infrastructure. Our experience and the

interviews show that project owners are often too overburdened with managing, validating and

processing the studies/proposals to get to actual project implementation and reach a bankability

stage. Often, there is also a lack of know-how to adequately engage with investors. In effect, this

can result in a strong push by donors or regional/multilateral institutions or investors, possibly

weakening regional ownership on the one hand and putting at risk the adequate prioritization and

efficient allocation of resources on the other.

There seems to be less donor funding available to support closing the capacity gap than for

technical studies and project financing in implementation phases. Most of the programs as

well as the facilities to support infrastructure development in the region focus on studies or project

financing. There are fewer programs available for capacity building in the area of infrastructure

project preparation and management capacities.

Phase I – Preparation

> Origination

> Strategy

> Commercialization and feasibility

Phase II – De-risking/financing

> Planning

> De-risking

> Financial model

> Permit and engineering

Phases III – VI – Implementation

> Implementation

> Operation

> Optimization

> Sale/transfer

"Go"/"no go" decision Final investmentdecision

Funding/support available Capacity constraints and gap

of funding/support

Capacity gap for end-to-end management

Funding/support available

9 CONCEPT PAPER


To help close the capacity gap, a more comprehensive and sustainable approach to

developing capacities is needed. Firstly, a larger amount of public funding for infrastructure

capacities development can greatly contribute to closing the gap. Secondly, capacity development

requires an innovative approach that develops capacities in a job environment in which the learning

can be directly applied while working on realizing a project or a portfolio of projects. In contrast to

technical assistance that delivers specific products and does the actual work for the developer to

process (e.g. studies, legal opinions, commercial due diligence, financial engineering, etc.),

innovative capacity development goes beyond that by delivering technical expertise while

implementing a project in a joint team with the beneficiaries.

10 CONCEPT PAPER


3. Concept – Capacity development should transfer skills while realizing projects

While capacity development is not a new concept, our approach is innovative in that it links

two overarching goals pursued simultaneously and reinforcing each other: Firstly, we develop

sustainable capacities to bring infrastructure projects from feasibility to bankability stage and bridge

the commonly prevalent gap to achieve full project readiness for implementation. Secondly, we

enable the swift realization of strategically relevant regional infrastructure projects. The integration

of both objectives allows the beneficiaries of the capacity development programs to firstly develop

skills, and secondly, to apply them immediately on a specific project, strengthening the learning

experience and ownership of the project. We integrate the training plan systematically with the

immediate needs required for project realization in each phase, thereby enabling the project teams

to practically exercise theoretically applied knowledge. Our approach delivers technical assistance

products (partly produced together with staff from the beneficiary institutions) and it develops the

skills as well as tools for the staff to work on other investment projects after the international experts

leave.

The core guiding principle in all of these measures is to create individual and organizational

sustainability and ensure long-term impact, e.g. by improving processes and organizational

structures, establishing standards, developing templates, tools and instruments, etc. for future use.

The approach builds on the idea that international experts work together on a daily basis with the

beneficiaries, i.e. with local experts from ministries, transport authorities, TSOs, etc. on concrete

day-to-day tasks involved in preparing infrastructure projects for financing and implementation.

We see capacity development as a process through which individuals and organizations

obtain, strengthen and maintain the capabilities to set and achieve their own development

objectives over time. It has two dimensions:

1. Organizational capacity building: internal policies, processes, structures and strategies that

enable an organization to operate and achieve its goals

2. Individual capacity building: skills and knowledge vested in individuals, communities and

groups

On the organizational dimension, the key is to create an anchor point for capacity building

via a dedicated unit at a higher level, e.g. with the Prime Minister's Office, in line ministries or in a

public agency. Infrastructure project development centers on a strategic Project Management Office

(PMO). It is formed by an integrated team of seconded officials from different departments,

ministries, agencies and public companies directly involved in the specific infrastructure project

working together on a daily basis and learning in a peer environment. The staff can remain part of

their "home institutions". More specifically, they should perform the role of link and single point of

contact to these institutions on the working level, ensuring that the specific contribution of these

institutions to the infrastructure project is being made. To be successful, this unit should be

mandated by the highest possible level of government. It coordinates all the activities for

infrastructure project preparation and ensures swift progress. Furthermore, it designs and

implements the organizational processes, structures and strategies necessary for implementation.

On the individual dimension, we develop capacities in two key areas: technical know-how as

well as managerial know-how. Technical capacities to be developed encompass the skills

required for the preparation of specific infrastructure projects in a specific sector and environment.

11 CONCEPT PAPER


They include, for example, policy analysis, strategy development, cost-benefit analyses, financial

business planning and modeling, fiscal impact analyses, knowledge of the EU regulatory

framework, ESIA and permitting standards, EU procurement framework and international tendering

standards, operational licensing standards, infrastructure financing models, design of public-private

partnerships, incl. sovereign guarantees and risk sharing models. Managerial capacities mainly

entail general project management skills for large and complex projects, e.g. scheduling, budgeting,

monitoring, reporting, cross-institutional coordination, communication skills and negotiation skills.

Figure 3 – Overview of capacity building for infrastructure development

The tailor-made formats we apply follow a common, overarching idea: To integrate

theoretical learning with immediate application in practice by closely aligning both the time and

the content of training with the respective needs for a given project preparation phase. Our most

widely applied formats include:

> Training on the job by working in integrated teams with international experts: We follow a task-

driven approach depending on the project phase, activities and challenges at hand that basically

supports the staff in tackling their workload for the specific project, rather than adding extra

workload detached from their daily duties.

> (Offsite) joint training sessions: These can be group workshops, executive education sessions,

interactive training, lectures, etc. on the key aforementioned technical capacities (technical skills

and topical expertise) and managerial capacities.

> Mentoring for government officials with international experts: The idea is to offer tailor made one-

on-one support that caters to the individual needs of selected staff. It includes an individual kick-

off session to determine the areas for support, as well as an individual action plan, training and

regular exchange on progress.

> Temporary externships/secondments: We offer to facilitate visiting sessions or field trips for

specific staff with the objective of learning by being exposed to another working environment in

their specific field, e.g. energy regulation, public transport management, etc.

Apply skills on infrastructure project

Develop capacities

PMO (local staff + experts)

Involved institutions

Infrastructure projects accelerated

Sustainable capacities developed

Regional ownership strengthened

Efficiency of public funds increased

Managerial skills: Project management, budgeting, coordination, negotiation, etc.

Prepare

> Policy analysis> Cost benefit analysis> Commercial validation> Fiscal impact analysis> …

De-risk/finance

> Regulatory framework> De-risking> PPP design> Financing model> …

Implement

> Tendering standards> Operating management> Optimization> Transfer> …

Prepare

> Commercial and technical feasibility secured

De-risk/finance

> Business case de-risked, PPP model negotiated, financing secured

Implement

> Project successfully implemented and operation optimized

Technical skills:

12 CONCEPT PAPER


Systematically developing individual and organizational capabilities is but one lever to

enhance the organizational performance of project developers. Others include, for example:

> Increasing staffing, number of experts/officials in key departments/teams

> Improving and growing the systems, tools, IT, etc. at hand

> Improving recruitment and talent retention

All aspects need to be taken into consideration as capacity building will only have a positive long-

term effect if the various areas are applied in an integrated manner.

The comparatively low retention rate of staff in the public sector in the region is a key

challenge. However, to ensure sustainability as far as possible, we implement a set of

activities aimed at increasing institutional memory as well as retention. For example, we promote

the anchor unit as a "circle of excellence" in the government by targeting high potentials and

offering a broad learning experience. Furthermore, we provide tools, templates, manuals and

materials that can be applied after international experts have left and develop an extensive and

accessible file sharing system with on-boarding and hand-over manuals that support the systematic

exchange of staff involved.

The success factors for sustainable capacity development in infrastructure encompass mainly the commitment of beneficiaries and involved staff as well as the technical expertise of the international experts involved. Functional knowledge of capacity building and general methodologies are important. However, bringing on board the "hard skills" of infrastructure preparation, validation, financing and implementation are key success factors for realizing a complex and large investment project that really creates an impact and serves as a lighthouse case for other investors. Our capacity development approach works on national as well as regional level. The general methodology and logic that is guided by one anchor unit whose participants form a direct link to the other involved institutions, is valid on both national and regional levels. The composition of the unit is crucial for its success. Naturally, the general capacity development approach outlined here will need to be tailored to the specific needs of the infrastructure project at hand, the beneficiaries' capacity level as well as the environment they operate in.

13 CONCEPT PAPER


4. Outlook – Governments and donors should work together to close the capacity gap

In conclusion, we see that a capacity gap with respect to effectively and efficiently managing

infrastructure projects exists with public project developers in the region, which hampers the

systematic preparation and implementation of infrastructure projects. While the pressure to deliver

on the projects continues and the EU, donors and public banks allocate funding to infrastructure

development, the capacity gap puts the speed of delivery, the ownership of infrastructure projects

as well as the most efficient use of public funding at risk.

An innovative approach to capacity development and increased donor support in this area

would help address these risks, accelerate infrastructure delivery and increase the

effectiveness and efficiency of public funding. The approach should transcend "classic"

technical assistance projects by combining the benefits of technical assistance to drive consistent

implementation with systematic capacity development on the job that ensures a sustainable transfer

of technical and managerial know-how to public project developers in the Southeast European

region. Certainly, capacity development cannot and should not replace technical assistance, as

procuring very specific skills for project preparation will always be more efficient than providing them

in-house, e.g. for specific studies, engineering design, etc. However, effective capacity building can

vastly improve and accelerate the management process of project developers and increase the

efficiency of project financing. Especially improving the viability of project financing as well as

public-private partnership models can greatly contribute to swift and efficient infrastructure

development in the region. Capacity building would also enhance the project developers'

engagement with investors who submit unsolicited proposals for infrastructure development.

National ministries, public project developers, donors and multilaterals should work

together to close the gap, identifying priority areas for capacity development. The process

should ideally be spearheaded by countries themselves and supported by donors. Some countries

have already set up extensive capacity building programs for large infrastructure development. For

example, the Albanian Ministry of Energy and Industry as well as the Swiss State Secretariat for

Economic Affairs (SECO) are implementing a project on "Capacity Building for Large Gas

Infrastructure in Albania". Such projects and the results that are being achieved together in

integrated teams with local staff and international experts clearly demonstrate the immense

potential benefits of capacity building to deliver on infrastructure projects and to build know-how

internally.

14 CONCEPT PAPER


5. Contacts

If you would like to learn more about our approach to support public project developers in

infrastructure project preparation, please get in touch. We welcome your questions, comments and

suggestions.

Heiko Ammermann

Roland Berger GmbH

Senior Partner

+49 69 29924 6237

[email protected]

Yvonne Ruf

Roland Berger GmbH

Principal

+49 160 744 6334

[email protected]

Date post:	15-Jul-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

CONCEPT PAPER Accelerating Infrastructure Preparation in ...€¦ · surveying, permitting).1...

Documents