Accelerating Growth in Southeast Europe: The Role of Roads

1. Accelerating Growth in Southeast Europe:The Role of Roads Road Congress for Southeast Europe September 18, 2000 Dr. Keith Crane Director of Research

2. Outline • After Difficult Decade, Southeast Europe Poised for Growth • Higher Incomes Resulting in More Cars, More Driving • Rapid Growth in Trade to Drive Transport Demand • Road Transport to Dominate • Shift to Heavy Trucks Necessitates Better Quality Roads

3. Southeast Europe Primarily Composed of Small Economies with Low Incomes

4. After Difficult Decade, Bulgaria, Romania Recovering FORECAST

5. Albania, Bosnia, Experienced Very High Growth, But From Low Base 68% 28% FORECAST

6. Lower Inflation Key to Recovery 579% FORECAST

7. Despite Economic Difficulties, Southeast Europeans Are Buying Cars • Regional car park has risen 60% between 1992 and 2000 • Most of the increase stems from imports of used vehicles from Western Europe • Dacia sales added to Romanian total • Increased park has dramatically increased road use, especially in cities

8. New Car Owners Have Different Road Use Patterns • Executive • Drives D, E segment vehicles less than 3 years old • Averages 30,000 kilometers per year • Mid-level manager • Drives C segment vehicle • Averages 15,000 to 30,000 kilometers per year • “Middle income” driver • Drives to conduct personal errands and vacations • Less than 5,000 kilometers a year • Retirees and farm workers: Sunday drivers

9. Road Use to Rise Rapidly • Rising incomes result in greater personal use of cars • Shopping • Vacations • Car usage double Bulgarian levels in Central Europe, southeast European usage will gravitate to these levels • Usage concentrated in cities, ring roads, improved urban corridors needed

10. Transport Activity Collapsed in First Years of Transition • Output of heavy industry plummeted • Disintegration of Yugoslavia reduced trade • Increased tariffs reduces demand • Profit motive improves rationality

11. Transport Industry Transformed • Shift to market economy transforms transport industry • Explosive growth in small private businesses increases demand for frequent, reliable deliveries • Growth in international trade in manufactures spurs demand for freight forwarding • Fall in output of bulk goods reduces demand for rail, barge services • Demand shifts from industry to consumers, heavy manufacturing centers to capital cities • Costs, not bureaucrats, determine mode

12. Transport Volumes Destined to Rise Again • Economic growth to boost transport of manufactured goods • Croatia to benefit from boom in transit trade • Continued declines in bulk commodity production in Romania slows transport volume growth • Interregional trade growth to be major contributor to increases

13. Exports Key Driver of Economic Growth, Transport Demand

14. Interregional Trade Forecast to Increase • Interregional trade relatively underdeveloped • Similar export mix • Low per capita incomes • Poor transport links • Tariffs and other trade barriers • Recent policy change triggering expanded trade • CEFTA membership, free trade agreements • Improved border crossings • Growing economies

15. Road Dominates in Tons Lifted • Common hauliers’ share of tons hauled has remained high • But rail dominates in terms of ton-kilometers • Barge has lost ground to rail • Despite low wages, sea transport has suffered as state-owned fleets have deteriorated

16. Despite Shift to Road, Southeast European Rail Still Major Player • Subsidized rail tariffs has delayed shift • Freight traffic most profitable rail operation, commercialized railroads concentrate on retaining freight customers • Private hauliers account for most road traffic, face difficulties in financing operations

17. But Railroads Will Continue to Lose Market Share • Railroads have responded to declines in traffic, revenues by reducing maintenance, investment • Railroads remain heavily overstaffed • Traffic less than 1/2 former levels • Employment down by far less than traffic declines • Major customers often insolvent • Passenger service still treated as social obligation • Railroads seek more investment, but no economic need for capacity expansion

18. Road Haulage Going Private • Over 50,000 trucking companies active in Romania • Bulgarian road haulage sector privatized • Large state-enterprise, SOMAT, sold to German firm • Thousands of small companies • Most companies focus on domestic hauling • Bulgaria, Macedonia center for transit traffic

19. Expanding Small Business Sectors Rely on Road Transport • Retailing recovering throughout the region • Stores remain small, need frequent deliveries • Capital-poor small business sector focuses on low-cost LCVs • Sector needs improved city streets, local 2-lane highways

20. Transport Industry Moving to Heavy Trucks • Economic expansion increases demand for long-distance hauling • Decrepit truck park makes renovation imperative • Subsidiaries of MNCs need just-in-time deliveries • Expansion of retail, wholesale networks increases heavy truck demand

21. Who Buys Heavy Trucks in Southeastern Europe? • Heavy truck buyers fall into five groups: • Formerly state-owned international hauliers • Privatized domestic regional trucking companies • New, incorporated international truckers • Small, domestic companies • Distributors, manufacturers that operate their own fleets • International truckers, distributors key customers for Western trucks • Domestic tariffs generally still so low that used imports, domestic vehicles remain attractive

22. Old East European Makes Finally Being Scrapped

23. Operating Costs Rising • Diesel prices up sharply in 1999, 2000 • Repair costs rising as devaluations push up parts prices • Tolls, taxes up • Drivers wages stay low, little growth since 1996

24. But Capital Costs Falling • Domestic interest rates down sharply in Bulgaria, Macedonia, Romania • Bulgaria, Romania cut tariffs • Stable currencies in Bulgaria, Macedonia result in substantial real effective appreciation, making heavy trucks more affordable • Improved commercial codes leading to use of leases, credit sales

25. Despite Rising Heavy Transport Fleet, Operators Face Limited Ability to Pay Tolls • Easy entry makes competition fierce, domestic rates too low to finance new vehicle • Low per capita incomes preclude rapid rise in haulage rates • Few retailers, manufacturers willing to pay premium for guaranteed delivery times • Hauliers take longer routes to avoid tolls • “Chargeable” tolls unlikely to completely cover road construction costs