Perspectives forinfrastructural investments in
the Three Seas region
A Special Report

Report byPartner

2

Selected Results from this Report35%

the forecasted GDP
growth in the Three Seas
region for the years up
to 203060%

the share of corporate
funding in infrastructure
investments that Three
Seas countries should aim
for

€1.1
trillion

the infrastructure
investments needed in
the Three Seas region by
2030

3 daysa duration of railway
travel from Tallin toConstanza – fostering thedevelopment of NorthSouth routes is one of the
key goals of the Three
Seas Initiative

3”The Three Seas Initiative will transform and rebuild theentire region and ensure that your infrastructure, like yourcommitment to freedom and rule of law, binds you to allof Europe and, indeed, to the West”
Donald Trump, President of the United States of America”An initiative which delivers key projects in energy,transport, digital interconnections. The Three Seas
Initiative is a catalyst for the cohesion and convergence of
the EU and for the strengthening of the transatlantic link”
Jean Claude Juncker, President of the European Commission

PLAN OF THIS REPORT

Plan raportu:
1. Economic potential and development models
2. Infrastructure investments – needs and financing
3. Transport investments
4. Energy investments
5. Digital investments
6. Supplement - Three Seas Initiative

4

5

1. ECONOMIC POTENTIALECONOMIC POTENTIAL

The Three Seas region combines stability
and dynamism

Institutional stability and economic growth – the Three Seas region
compared to the ‘EU 15’ and large emerging markets

The Three Seas (the TS) region is a border region, both
geographically and economically, between East and West andbetween emerging and developed markets.

8
Three Seas

EU15

Emerging Markets (f rom the G20 group)

By combining characteristics of emerging and developed markets,
the TS region has become a unique and attractive investment
location. TS countries boast higher GDP growth than developed
markets, and, at the same time, have much higher stability indicators
than the average emerging market nation. One can see that bylooking at various indices, such as the Fragile State Index, WorldBank Doing Business results, or Global Competitiveness Indicators.
TS countries combine relatively high growth with relatively highstability. Therefore investors can achieve relatively high yet safe
rates of return from their assets.

GDP growth in 2018

7
6
5

4
3

2
1
0
90

80

70

60

50
40
Stability of the country

30

20

10

0

* Fragile States Index (assumes a value from 0 to 120) based on the Fund for Peace foundation; economic growth based on
the forecasts of the International Monetary Fund** Emerging Markets: Saudi Arabia, Argentina, China, Brazil, India, Indonesia, Mexico, Russia and South Africa
Source: SpotData, IMF, Fund for Peace

Some of the countries in the Three Seas region have already beenclassified as developed. Austria is undoubtedly in that group.
According to the International Monetary Fund, the Czech Republic,
Slovakia, Slovenia and the Baltic States can also be described as
developed. The World Bank also puts Poland, Hungary and Croatia
into this category. On the other hand, financial investors usuallyclassify the Three Seas countries (other than Austria) as emerging
markets.

6

ECONOMIC POTENTIAL
Growth of GDP per capita in relation to Germany fromthe moment of exceeding 33% (in relation to Germany)

Growth path is similar to Asian tigers
It is not a well-known fact that the TS region is one of the fastest
growing regions in the world, taking into account the initial level ofincome. GDP per capita in TS countries has trodden a similar path to
the Asian tigers when the latter were at the comparable level ofdevelopment. A few TS countries have managed to achieve thesame convergence rates as Japan between 1970 and 1980, withthose including the Baltic States, Slovakia and ‒ to some extent ‒Poland. Other TS countries, such as Romania and Croatia, havegrown at slower rates, although growth in these countries
accelerated after accession to the European Union.

93%

Japan path

GDP per capita, as % of Germany

83%

73%

Lithuania

Estonia

The growth record of TS countries is staggering in the light of thefact that only a few countries in the world have managed toconverge with Western standards in terms of labour productivity
and GDP per capita. The general conclusion of economic researchon growth is that in the long term convergence is very rare. The few
exceptions include the Asian Tigers (Japan, Korea, Taiwan,
Singapore and Hong Kong), which in the decades after the Second
World War achieved very high growth rates and almost closed the
productivity gap with Western Europe and the United States. There
are also a few examples of successful convergence in Europe,
including Spain, Ireland and Finland.

Slovakia

63%

PolandLatvia53%

Croatia

Romania
Bulgaria

43%

33%

1

3

5

7

9

11

13

15

17

19

21

23

years since crossing a threshold of 33% in relation to Germany

Source: SpotData, GGDC

25

27

29

7

ECONOMIC POTENTIAL
Rate of economic growth (in percent per year) and the difference between theThree Seas region and Germany (in percentage points)
8

Three Seas

Germanydifference to Germany.: +2,2 p.p.

difference to Germany: +0,7 p.p.

difference to Germany:+1,2 p.p.

6

GDP growth, in percent

4

2,47

2

1,21

0
1996

1999

-2

2002

2005

2008

2011

2014

2017

2020

2023

How the golden rule of convergenceworks
The growth performance of the TS can be viewed through the prismof the golden rule of convergence. This rule has worked perfectly inthe region and nothing suggests that this may change in theforeseeable future.
The golden rule of convergence was coined by the American
economist Robert Barro. It states that among countries or regions
which share similar institutional or economic characteristics thepoorer ones should close the productivity gap with richer ones at a
rate near to 2% per year. In the case of the level of income in the TS
region, GDP growth rates should be 1.5 to 2 percentage points
higher than GDP growth rates of the richer countries in Europe.
The growth of GDP in the Three Seas region fits perfectly with thegolden rule. Since early 1990 growth in Three Seas region has been
approximately 1.5 p.p. higher than in Germany and most forecasts
indicate that the relevant advantage in growth rates should bemaintained in the foreseeable future. For example, according to IMF
forecasts, the premium will equal an average of 1.2 p.p. until 2023.
The gradual decline of this premium stems from the fact that risingproductivity levels lead to a lower absolute convergence path.

-4-6

Source: SpotData, IMF

1.2
pp

Most forecasts indicate that theappropriate premium in growth rates
should be maintained in theforeseeable future8

6

ECONOMIC POTENTIAL
GDP forecast for the Three Seas region, in trillion euro, at 2017 prices

GDP forecasts
Estimating infrastructure investment needs requires assumptions
about future GDP levels to be made. We set up a simple forecastingmodel, which is based on long-term productivity trends,
convergence processes and UN demographic projections, and thencompared the results of our model with OECD projections.

eur trillion, constant 2017 prices
1,70

1,75

2018

1,79

2020

1,83

1,88

2022

1,92

1,97

2024

2,02

2,07

2026

2,12

2,18

2028

2,23

2,28

2030

In 2017 the aggregate GDP of the Three Seas region was €1.7
trillion. According to our forecasts, the average GDP growth rateuntil 2030 will be close to 2.4% and GDP in 2030 (in 2017 constantprices) will be €2.3 trillion. This is the central path of our forecast.
One can identify two important risk factors which can lead todifferent scenarios. On the one hand, with higher productivity in theThree Seas region convergence rates may slow quicker than
predicted in our model. On the other hand, demographic projections
may underestimate the immigration potential of the Three Seas –Poland has already opened its borders to more than one million
immigrants and other countries are likely to follow suit. We assume2032 that the two factors mentioned above will balance each other.
OECD forecasts predict slightly slower GDP growth in Three Seas
region until 2030: 2% per year. However, the organisation does not
publish its forecasts for some countries which currently grow fasterthan average, such as Romania. OECD forecasts by country are very
close to ours.

Source: SpotData

9

ECONOMIC POTENTIAL

10

Ranking - Doing Business of The World Bank
Three Seas region versus Germany

2005

2007

2009

year of ranking
2011
2013

Return on assets from Foreign Direct Investments(FDI income/FDI asset value, average for 2010-2017)

2015

2017

0

10

position in ranking

20

dif f erence in 2018: 13
Germany30
dif f erence in 2005: 31

40

50

60

Three Seas

Czech Rep.
Lithuania
PolandEstonia
Slovakia
LatviaIreland
Malta
Hungary
SwedenNetherlands
FinlandRomania
Bulgaria
UK
Denmark
Slovenia
Austria
Portugal
Spain
CyrpusGermany
Italy
Croatia
Belgium
Luxembourg
FranceGreece

10,6%
8,7%
8,4%
7,9%
7,6%
7,3%
7,1%
6,0%
5,3%
4,8%

Other EU countries

4,7%
4,7%
4,5%
4,4%
4,3%
4,3%
3,9%
3,8%
3,5%
3,5%
3,4%
3,4%
3,4%
3,0%
2,9%
2,8%
-0,4%

-2%

0%

2%

4%

6%

return on investments

Source: SpotData, The World Bank

Three Seas
countries

4,9%Source: SpotData, Eurostat

8%

10%

12%

11

2. INFRASTRUCTURE INVESTMENTS –DEMAND AND FINANCINGINFRASTRUCTURE INVESTMENTS

How to define infrastructure

Definitions of infrastructure

ECONOMIC DEFINITION
assets in selected sectors of
the economy, most often in
the following sectors:
transport, energy, watersupply and waste
management,
telecommunications,healthcare and education

DEFINITION BASED ON
PHYSICAL
CHARACTERISTICS
special purpose constructions
assets, such as car, railway
and water roads, bridges,
power andtelecommunications lines, etc.

FINANCIAL DEFINITION
assets subject toregulations, the use ofwhich relates to licences
and permits, and thefinancing of which is basedon specific, dedicatedvehicles (project finance,
PPP)

Source: SpotData

In recent years there has been a wave of research publications
estimating infrastructure investment needs. The main reason for theincreased attention paid to this problem is that after the financial
crisis of 2008 many governments resorted to cutting investments asa key tool for rebalancing budgets. Investment is the most elastic
element of every fiscal plan: it is relatively easy to cut. Therefore
economists in various institutions started to calculate what the costsof reduced investments are and what amount of new financing
would be needed to return investments to pre-crisis levels.
In order to properly define the problem a good definition of
infrastructure was required. A variety of definitions are available.
The most popular approaches include the sector approach and theassets approach. In the former infrastructure is defined as grossfixed assets in certain sectors: transport; energy and other utilities;
telecommunications; health; and education. In the later approach
infrastructure is defined as specific constructions, such as roads,
railroads, regulated rivers, bridges, ports, airports, energy
transmission and distribution lines, telecommunications lines etc.
There are also other approaches to defining infrastructure, pointing
to specific investment risks, regulatory regimes, and economic
features (e.g. monopolies).

12

INFRASTRUCTURE INVESTMENTS
Demand for infrastructure investments in the Three Seas countries in theyears until 2030, using various definitions of infrastructure

1200000
Health
Education

1000000

Utilities
Energy distribution

mln euro

800000

Telecom
Transport

We have made three types of estimates for the infrastructure
investment needs in the Three Seas region over the years until 2030.
In the first two we used our own calculations, based on methodology
used by McKinsey (2013) and Bchattacharya et al. (2016). In the third
instance we used estimates from the European Commission, made for
the European Union, and adjusted them to the Three Seas region.
In the first estimate we have used the broadest, sector definition of
infrastructure. This estimate can be treated as the upper limit ofpossible investment needs. In this approach the total investment
needs will be €1.15 trillion for the years until 2030.
In the second estimate we used the asset definition of infrastructure
and included expenditure on roads, railroads, inland waterways, ports,
airports, energy lines and telecommunication lines. We also included
expenditures for digitalisation of those assets, because fostering
digitalisation is one of the key policy pillars of the Three Seas
Initiative. In this approach the total investment needs will be €530
billion for the years until 2030.

6000004000002000000Total inf rastructure (broad,
sectoral def inition)

Source: SpotData

What will the investment needs in theThree Seas region be

Network inf rastructure

Critical regional networks

In the third estimate we calculated the investment needs regarding
infrastructure networks with transnational significance. We assumed
that the Three Seas region will need to maintain an investment rate
1.4 times the investment rate for Western Europe. As a point ofreference, we used the estimates of the European Commission
concerning the investment needs of the European Union intransnational European networks until 2030. According to thisapproach, the total investment needs for the years until 2030 will be€270 billion.

13

INFRASTRUCTURE INVESTMENTS
The inflow of EU structural funds to the Three Seas countries inrelation to GDP

In order to finance large infrastructure projects the Three Seas
countries will have to utilise private funds to a greater extent than inrecent years. This is due to the fact that European Union structural
funds, which are the main source of infrastructure financing, willflow at a decreased rate over the coming years.

2,0%

1,6%

The inflow of the EU structural funds in the last decade totalled
almost 2% of GDP in the TS countries. These funds financed almost
half of all infrastructure investments, and in the case of core
infrastructure, such as roads, their share was even higher. For
countries such as Poland, Romania and Bulgaria the EU funds
started a new era for infrastructure development.

1,2%

1,8%
0,8%

1,4%

0,4%

0,0%
2014-2020

Source: SpotData

Why investing in infrastructure will
require a new approach

2021-2027

However, the inflow of those funds will decrease substantially, fromalmost 2% of GDP to approximately 1.5% of GDP. Using 2018
prices, that means €80 billion less in funds over the years from 2021
to 2027.
There are three reasons why the stream of EU funds will start to dry
up. Firstly, the growing GDP per capita in the Three Seas countries
results in a lower number of regions that can apply for these funds(EU funds are allocated based on two thresholds: 75% and 90% of
the EU average GDP per capita). Secondly, the regions which were
hit hardest by the financial crisis are located in Southern Europe:
Greece, Italy, Spain and Portugal. The EU wants to support themmore in order to preserve social cohesion. Third, the United
Kingdom leaving the EU will reduce the total budget by about 10%.

14

INFRASTRUCTURE INVESTMENTS
The structure of financing infrastructure investmentsin the European Union, in percent

Infrastructure as an investment asset‘new’ EU members*

The Three Seas countries need new sources of investment financing
and should aim, in the long run, to achieve a financing structure akin
to Western Europe, with a 30%–40% share of government funds
and a 60%–70% share of market funds.

EU-15
The financing structurein the ‘new’ EU countries
should converge to thestructure observed inthe ‘old’ member states
35

45

55
65

government

government

corporations

corporations

Source: SpotData; *countries that joined the EU in 2004; ** government financing refers to general government
expenditure

Fortunately, the region is not alone in the quest for a new,innovative approach to funding infrastructure projects. Due tobudget constraints, resulting from fiscal savings efforts after thefinancial crisis, searching for new sources of infrastructure financing
has become a global challenge. Many international organisations
have started to pay more attention to this problem, including theInternational Monetary Fund, the World Bank, the OECD, and theEU. At the G20 Summit in Toronto in 2014 a decision was taken tolaunch the Global Infrastructure Initiative, the aim of which is
promoting infrastructure investments based on a combination of
public and private financing.
Since then many organisations have started analytical efforts related
to the creation of institutions favouring a new approach to the
problem. Supporting the creation of investible assets backed byinfrastructure projects is one of the most important goals of these
efforts. There are two pillars on which these activities should bebased. The first is the increased transparency of infrastructure
investments, mainly through the creation of new datasets, banks ofknowledge and propagation of good practices. The second is theactivity of national development banks, the role of which in fostering
private investments in infrastructure should increase. It is precisely
this pillar on which such initiatives as the European Fund for
Strategic Investments (known as the Juncker Fund) and the newly
created Three Seas Investment Fund are based.

15

INFRASTRUCTURE INVESTMENTS

The Juncker Plan paves the way

Participation of Three Seas nations in projects financedby the Juncker Plan

One can see how the new approach to financing infrastructure canwork in practice from the activity of the European Fund for
Strategic Investments, which has become known as the Juncker
Fund, taking the name of the President of the European
Commission,
Jean-Claude Juncker. Over the three years immediately after its
creation in 2015 the fund provided €21 billion to make possible
total investments of around €350 billion. It was one of the factors
which helped the European economy to recover after the debt crisis
in 2012/2013.

16%
14%

12%
10%
8%
14%
6%

11%

11%

4%
2%
0%
Three Seas' share in total
investments (2017)

Source: SpotData

Three Seas' share in
accepted ESFI projects(based on ESFI financing)Three Seas' share in
accepted ESFI projects(based on total inv. value)

Although the early opinions about the impact of the Juncker Plan on
the European economy were rather sceptical, today it is regarded asa success. It is no accident that the investment dynamics in the EU
have improved substantially since early 2015, despite the fact thatthe situation has not changed much in other developed countries.
The Three Seas countries use this funding stream extensively: theregion’s share in projects financed by the EFSI stands at 14%(comparing to the region’s 11% share in total investment volume in
the EU). The countries leading in terms of EFSI usage are the Baltic
States and Bulgaria.
Another example of a similar project which aims to foster private
investments in key infrastructural assets is the Connecting Europe
Facility, a fund which focuses on funding trans-European networks
for transport, energy and telecommunication. The profile of thisfund resembles the Three Seas Fund, although the CEF uses grants
instead of market instruments.

16

INFRASTRUCTURE INVESTMENTS

17

The Juncker Plan could play a role in lifting investment in the European Unionout of the post-crisis malaise

10

start of the Juncker Plan

8

percent year on year

6

EU28

G7

4

EU average
2015/18

G7 average
2010/14

G7 average 2015/18

2

EU average
2010/14

0
2010
-2

-4

-6

Source: SpotData, Eurostat

2011

2012

2013

2014

2015

2016

2017

2018

18

3. TRANSPORT INFRASTRUCTURE
INVESTMENTS

TRANSPORT INVESTMENTS

19

Estimated demand for transport investments in the Three Seas countries
in the decade until 2030

roads

railroads

inland and maritime transport

165 bn euro

100 bn euro

13 bn euro

Total ~ 290 bn euro
Regional infrastructure ~ 120 bn euro
Source: SpotData

airports

11 bn euro

TRANSPORT INVESTMENTS

The quality gap in infrastructure stillwide open

Quality index of transport infrastructure, according
to the World Competitiveness Report

Transport infrastructure is the most important element of
infrastructure network in every country. It is responsible for 30%–
40% of global infrastructure investment volume. The European
Investment Bank estimates that the optimal transport infrastructure
investment rate in the EU should be 1% of GDP, but in the Three
Seas region the rate should certainly be much higher, around 1.4%–
1.5%.
The quality of the transport network in the Three Seas region has
been gradually improving, but convergence with Western standards
is a long-term process that will not be completed anytime soon. Overthe last decade, a few countries in the Three Seas region, mainly
Poland, Romania and Bulgaria, have made significant improvements
in terms of transport infrastructure quality. But progress in othercountries has been minimal at best. The average quality oftransportation networks in the TS region, as measured by the Global
Competitiveness Report, has approached the German level, but only
because of underinvestment in infrastructure in Germany.

7

Germany

infrastructure quality, valued in points

6

5

max

4

average

3

2

THREE SEAS

minconvergence of weakest countries

1

0
2011

2012

2013

2014

Source: SpotData, Global Competitiveness Report (2018)

2015

2016

2017

2018

Over the last decade, a few countries in the Three Seas region,
mainly Poland, Romania and Bulgaria, have made significant
improvements in transport infrastructure quality. But progressin other countries has been minimal at best.

20

TRANSPORT INVESTMENTS
Travel times between selected large northern and southern ports inthe ‘EU 15’ and in the Three Seas region

Gothenburg (Sweden)

Tallin (Estonia)

distance~2500 km~2500 kmcar travel time
24h

32h

train travel time
~1 dayBarcelona (Spain)

Source: SpotData, based on Google Maps

~3.5 days
Constanta (Romania)

North-South routes need expansion
One of the crucial strategic goals of the Three Seas Initiative isfostering the development of the North-South infrastructure routes.
The argument that these routes are seriously underinvested in had
been advanced before the initiative started and has become one ofthe pillars of its investment strategy.
In 2015 an American think-tank, the Atlantic Council, published ananalysis in which it argued that intensified integration along NorthSouth lines in Central Europe is a necessary condition for developing
an effective internal market in the EU and providing the union withenergy security. The argument was based on the observation that
North-South routes in the region were underdeveloped, due to adeliberate policy of the Soviet Union between 1945 and 1989,
which had favoured the integration of the Soviet bloc with its centre
and prevented the development of regional ties. After thetransformation in 1989 East-West networks have served the new
integration efforts well with Western Europe and with new supply
chains, which were concentrated around German producers. Due tofiscal constraints, however, North-South routes remained
underinvested. The Three Seas initiative aims to change that.
To demonstrate the practical aspect of this problem we compared
the travel time on routes of comparable distance in Western andEastern Europe: Gothenburg to Barcelona and Tallin to Constanza.
Both routes connect important northern and southern ports.
Whereas one needs 24 hours by car and slightly more than one dayby train to get from Gothenburg to Barcelona, it takes 32 hours by
car and 3.5 days by train to get from Tallin to Constanza.

21

TRANSPORT INVESTMENTS

Rail should come out of the shadow

Rail cargo transport in relation to total trade in goods between
selected countries, in percent

Another important challenge in the area of transport for the Three
Seas region is rebalancing the investment proportions between roadand rail. Compared to Western Europe, railroads in the Three Seas
region are underinvested in compared to roads. The average
investment ratio between rail and road in Western Europe in thetwo decades since 2000 has been 1:1, whereas in the TS region it
has been 1:2. For this reason some countries in the TS region plan toincrease the share of rail investments in the total infrastructure
investment pot.

60%
53,1%
50%

40%

30%

20%

Increased rail investments should be particularly directed towards
international connections in the Baltic States, Poland and SouthEastern Europe (Romania and Bulgaria). Those countries are poorly
connected with each other, and the amount of goods transported byrail is very low.

25,9%
19,3%
13,3%

10%

7,1%
4,1%

0%

-10%

Source: SpotData, based on Eurostat and own calculations

3,1%

1,7%

0,6%

0,5%

Expansion of rail networks will also play an important role in theelectrification of transport services, which means replacing fossil
fuels with electricity coming from renewable sources. Althoughelectric cars are becoming much cheaper, and they will certainly be
used in the transportation sector on a large scale, trains are a morenatural way to increase electricity use in transport.

22

TRANSPORT INVESTMENTS
Length of waterways and volume of goods transported by inland
waterways, the Three Seas region compared to Germany
The volume of transport of goods by inland
waterways

The length of inland waterways

250

12000

10000

200

4000

mln tonnes

km

150

10 474

221

100

7 675

50

2000

82

0

0
Germany
Source: SpotData, Eurostat

Three Seas

Germany

potentialofinlandThe previous section underlined that rail investments can support
the change towards a zero-emissions economy. However, the mostefficient way to support climate policy would be to use the mostunderinvested transport network in the Three Seas region: inland
waterways. The length of this network in the TS region is 30%
higher than in Germany, but the volume of goods transported byriver is 63% lower than in Germany. This reflects the hidden
potential inland waterways offer.
Inland waterway transport plays an important role in EU transport
policy, which promotes multi-modal transport. In a white paper
published in 2011, which set out the pillars of EU transport policy,
the goal was set to move 30% of road transport to other modes oftransport, especially rail and inland waterways, by 2030 and 50% by
2050. This policy aims at reducing congestion and eliminating someemissions.

8000

6000

The hidden
waterways

23

Three Seas

It is worth mentioning that inland waterways transport makes
possible an effective movement of goods per litre of fuel (volume
multiplied by distance) which is 130% higher than road transport.
This should be an important factor for countries which have higher
than average emission indices.

24

4. ENERGY INFRASTRUCTURE
INVESTMENTS

ENERGY INVESTMENTS

25

Estimated demand for investments in energy networks in the Three Seas countries
in the decade until 2030

electricity transmission

electricity distribution

gas infrastructure

21 bn euro

51 bn euro

16 bn euro

Total ~ 87 bn euro
Regional infrastructure ~ 28 bn euro
Source: SpotData

ENERGY INVESTMENTS

Energy transformation will need longer
transmission lines

Investments in transmission lines (high voltage) in the world; datafrom the International Energy Agency (IEA)
90
80

IEA forecast

70

bn US dollars

60
50
40
30
20
10

0
2010

2012

Source: SpotData, IEA

2014

2016

2018

2020

2022

2024

2026

2028

2030

Although transport is the most important infrastructure area in termsof investment volume, energy may be the most important in terms ofspeed of transformation. The pressure for the adoption of green
technologies is rising and will require countries in the Three Seas
region, as well as in the entire European Union, to intensify
investment efforts. With regard to regional network infrastructure avery important role will be played by transmission lines.
Energy infrastructure is at the core of the interest of the European
Union for at least two reasons.
Firstly, meeting the EU’s ambitious climate policy targets (such as
achieving a share of renewable sources of energy in energy
consumption of 40% by 2030) will require the creating of a large,
integrated European energy market, with substantial trading potential.
In decentralised energy systems, where numerous small facilities
produce energy, the scale of the market is crucial for maintaining
stability of energy supplies. That is why the role of transmission lines
which transmit energy over long distances will grow. The International
Energy Agency estimates that average investments in transmission
lines will rise by 50% by 2030 as compared with 2010–2015.
Secondly, a well-functioning energy grid, linking all EU markets, isbelieved to be one of the pillars of energy security. In the past
European energy markets were isolated from each other, because
energy production and distribution were deemed too important
politically to let the sector be governed by free market mechanisms.
Today, as the structure of energy markets evolves, and the scale
becomes much more important for providing stability, security will
require connecting national grids to each other.

26

ENERGY INVESTMENTS

Integrated markets
connections

How the EU countries meet the three conditions for the
harmonisation of the electricity market

27

will

requiremore

Despite substantial financial effort over recent years, theinterconnectedness of the European electricity markets has still notreached satisfactory levels. The European Union aims to achieve aninterconnectedness capacity for each country of 15% of production
capacity, and member countries are very close to hitting that target. But
there are other operational targets, set in 2017 by a special working
group of the European Commission, which are further away from being
met (although they are not binding, they indicate the milestones formarket integration).

all conditions met
two conditions met
max one condition met

Source: SpotData, European Commision

These targets are:
•Minimising differences in wholesale market prices. Additional
interconnections should be prioritised if the price differential exceeds anindicative threshold of €2/MWh between Member States, regions orbidding zones to ensure that all consumers benefit from the internalmarket in a comparable manner. The higher the price differential, thegreater the need for urgent action.
•Ensuring that peak demand can be met in all conditions through a
combination of domestic capacity and imports.
Therefore countries where the nominal transmission capacity ofinterconnectors is below 30% of their peak load should urgently
investigate options for further interconnectors.
•Countries where the nominal transmission capacity of interconnectors
is below 30% of installed renewable generation capacity should urgently
investigate options for further interconnectors.
Part of the Three Seas region has already achieved good integrationlevels in the electricity market, but some countries, notably the Baltic
States, Poland, Romania and Bulgaria, need further investments.

ENERGY INVESTMENTS
Indicators of liquidity development on the European gas markets
according to the AGTM model used by the Agency
for the Co-operation of Energy Regulators

Broad liquidity, sizeable forward
markets which contribute tosupply hedging
High liquidity, more reliant
comparatively on spot products,
progress on supply hedging
Improving liquidity from a lower
base taking advantage ofenhanced interconnectivity andregulatory interventions
E mbryonic liquidity at a low leveland mainly focused on spot,core reliance on long-term
contracts and bilateral deals

Source: SpotData, "ACER Market Monitoring Report 2017 – Gas Wholesale Market Volumes”, ACER, 2018

The gas market in Europe should be
more liquid
The European Union is the second largest consumer of gas in theworld, behind only the USA, but it has a relatively low domestic
production capacity. More than 75% of the gas consumed in the EU
is imported, mainly from Russia, Norway and Algeria. The key aim of
the gas market policy of the European Union is to create a single,
large, integrated market in which trading hubs with high liquidity,
spot contracting and market prices will replace long-term quasifixed-price (adjusted only based on the oil-price benchmark)bilateral contracts with strategic suppliers. Building efficientinterconnectors is a necessary step in creating such a market.
Whereas Western European markets are close to meeting thediversity and liquidity targets, the Three Seas region performs muchworse with regard to most benchmarks and requires intensified
investments in interconnecting pipelines and new sources of supply.
Some countries, such as Poland, the Czech Republic and Austria,
have advanced in terms of diversification of supplies and market
liquidity, but even those countries rely too much on long-term
bilateral contracts. And most other countries in the region are onlyat the beginning of the journey towards integrated and liquidmarkets.
Due to slow development of the gas markets the eastern flank of
the EU is treated as a region of heightened demand for gas
infrastructure. An analysis prepared for the European Commission
estimates that half of all strategic investments in gas infrastructure
over the next decade should be made in this region.

28

ENERGY INVESTMENTS
The financing structure of the BRUA gas corridor, Romanian section

100%

Other financing

90%
80%

European Bank for Reconstruction andDevelopment

70%
60%

European Investment Bank

50%

40%

European Union

30%

20%
10%
0%

Source: SpotData, EBRD

TransgazJuncker Plan
financing

Projects which pave the way
There are projects which have already successfully paved the way
for the future engagement of the private sector in infrastructure
investments. In the Three Seas region many projects from the TEN(Trans-European Networks) program are being carried out, andmany have the status of common interest projects, i.e. projects
which enhance the workings of the single European market. Veryoften those projects involve both public and private funding.
Two of the four geographic areas identified by the European
Commission as crucial for the future investments in energy
networks are made up of Three Seas countries: the Baltic region andSouthern Europe region.
In the first of these regions the main aim is connecting the Baltic
states with the rest of Europe through energy bridges between
Sweden and Lithuania (Nordbalt) and Poland and Lithuania (theLitpol link), and through gas interconnectors between Poland andLithuania and Estonia and Finland.
In the later region the key aim is diversifying supplies of gas, mainly
through constructing a new gas terminal on Croatia’s Krk island andcreating various interconnecting lines, such as BRUA (between
Bulgaria, Romania, Hungary and Austria). BRUA is a good exampleof how public and private financing can be combined. The projectdraws on various sources of funding: local capital, EU funds, Juncker
Fund guarantees, EBRD loans and private financing.

29

30

5. ICT INFRASTRUCTURE INVESTMENTS

DIGITAL INVESTMENTS

31

Estimated demand for investments in ICT infrastructurein the decade until 2030

telecommunication infrastructure

130 bn euro

ICT infrastructure in transport and energy

30 bn euro

Total ~ 160 bn euro
Regional infrastructure ~ 122 bn euro
Source: SpotData

DIGITAL INVESTMENTS
Change in investments by asset types in the European Union in
2007-2017, in percent
40
30

change in percent

20
10

0
-10
-20
-30

Source: SpotData, European Commission

Digitalisation is the future ofinvestments
Digitalisation is one of the most important megatrends in themodern world. Data gathering and analytics in industry and services
are increasing their pace. The structure of investment activity in the
EU over the last decade is a case in point. Whereas the total
investments level in the EU after the financial crisis has collapsed
due to lower demand and the credit crunch, the investments indigital assets have increased – in software by almost 40% and in ICT
hardware by more than 20%.
One of the key areas of future digital investments in Europe will be
the creation of 5G network infrastructure. According to Gunther
Oettinger, the European Commissioner for budget and humanresources, the EU will be a global leader in implementing 5G
solutions. Large investments should kick-off at the beginning of thenext decade. The total investment demand in telecommunication
infrastructure in the EU could be as high as €800 billion.
In addition to the high-tech mobile network, there are other areas ofcommon European interest which will require digitalisation, such astransport, energy, trade, and government services. These
investments may play a particularly important role in the eastern
peripheries of the EU, where digital assets per capita are much
lower than in Western Europe. McKinsey (2018) points out that inan optimistic scenario intensive digitalisation could raise GDP
growth in the region by up to one percentage point a year. This is avery optimistic assessment, but it might reflect the chances related
to digital catching-up.

32

DIGITAL INVESTMENTS

The challenge for the TS region is to
kick-off digital convergence

Digital expenditures in relation to GDP in EU countries, panel datafrom 2008-2016

Digital investments have some different characteristics than
traditional infrastructure investments. For that reason this area may
require the most innovative approach to financing. Unlike transportand energy infrastructure, the paths are not paved and there are few
examples of large-scale international projects in the region fromwhich lessons can be learned.

6%

digital spending as % of GDP

5%

What differentiates digital investments from energy or transport
investments is that they are primarily financed by the private sector.
Moreover, the rate of digital investments, which is their relation toGDP, is positively correlated with GDP per capita, which means thatricher countries spend relatively more on digital projects. This canbe explained in various ways. Richer countries compete bydeveloping frontier technologies and have to take risks to developthese. Also, richer countries’ societies tend to have higher digitalcompetences and thus create more demand for digital services thansocieties in emerging markets.

4%

3%

2%

1%

0%
0

5000

10000

15000

20000

25000

GDP per capita in PPS

Source: SpotData, European Commission

30000

35000

40000

The features of digital investments make the need for public
support for these investments in the Three Seas region urgent.
McKinsey (2018) recommends that intensified digitalisation requires
regional co-operation to support the private sector, especially withregard to setting up regional infrastructure, such as fibre-optic
networks, 5G networks, e-commerce logistics hubs, and digitaltransformation in the energy sector.

33

DIGITAL INVESTMENTS
Percentage of orders which transport and logistics companies receivefrom abroad through the Internet or apps, as a percent
of total orders

The Three Seas region can make betteruse of its natural comparative advantages
Most countries in the Three Seas region have natural comparativeadvantages in the services sector, mainly due to low unit labour costs
and the high quality of the labour force. Therefore these countries
have for a long time been strong advocates of the liberalisation of theservices markets in the EU. Now they have a chance to make betteruse of these comparative advantages, by digitising services andtherefore enabling local companies to have broader reach within the
single European market.

more than 10% of orders
7-10% of orders
4-6% of orders
below 4% of orders

A good example of where the excellent potential to achieve good
returns from digitalisation can be found is the logistics sector. This
sector has recorded an enormous growth rate in recent years, withlogistics employment in all Three Seas countries rising by 25%
between 2008 and 2018. Particularly high growth rates were recordedin Poland (employment growth of 100%), the Czech Republic (40%)
and Hungary (130%). At the same time, digital services in the logistics
sector are still very weak in the region. The share of foreign purchases
via the Internet in total purchases is very often no higher than 5%, andin Poland it is only 3%.
Increasing digital investments in this sector can bring important
benefits. The leaders of the Three Seas Initiative understand suchchallenges, which is why they placed creation of digital platforms forlogistics in the first place on the list of the critical digital investment
projects in the region.

Source: SpotData, European Commission

34

35

6. SUPPLEMENT | THREE SEAS INITIATIVE

THREE SEAS – MILESTONESThe Three Seas Initiative (the TSI) was foundedin 2015 at the presidential level as a platform
for the cooperation of countries locatedbetween three seas: the Baltic, the Adriatic and
the Black Sea.
The countries taking part in the TSI are: Austria,
Bulgaria, Croatia, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania,
Slovakia and Slovenia.
The strategic goal of the TSI is fostering economic
convergence of the Three Seas region with thewestern part of the European Union by developmentof enhanced infrastructure, economic and social
cooperation and interconnectivity of the Three Seas
countries
An important goal of the TSI is the developmentof infrastructure for transport, energy anddigital telecommunication, especially along theNorth-South axis, by supporting thedevelopment of cross-border and transnational
projects.

36

2016

2017
6 July, Warsaw (Poland): theThree Seas Summit,
attended by the Presidentof the United States,
Donald Trump.

2019

setting up of the Fund

25 August, Dubrovnik (Croatia): the firstThree Seas Summit and a Joint Statement
about expanding the existing cooperationin energy, transportation, digitalcommunication and economic sectors

2018
18 September, Bucharest (Romania): theThree Seas Summit, the signing of theLetter of Intent to set up the investment
fund for realization and financing of the
key infrastructure projects in the Three
Seas region

THE THREE SEAS FUND

37

1 The Fund§The Fund is going to be the economic dimension of the Three Seas Initiative
and will be an investment vehicle for financing key infrastructure projects in
the region.
§The National Promotional Institutions (NPBIs) from the Three Seas countries
will be co-founders of the Fund.

2 Structure and capacity§The Fund will be created under Luxembourg law, which is known andaccepted by international investors. Luxembourg is the centre of theinternational investment funds market.
§The co-founders of the Fund will have an impact on the terms of the Fund's
operating conditions as stated in the founding documents and will exercise
active investor supervision through participation in the Fund’s bodies.
§Apart from the NPBIs, international institutional investors and international
development institutions will be invited to participate in the Fund.
§It is preliminary assumed that the Fund size will amount up to €5 billion andwill generate investments with a total value of up to €100 billion.

3 Investments§ There will be a two-step process for selection of investments made by theFund. A list of projects will be generated by the Three Seas countries. Those
projects will be checked and analysed by an independent fund management
entity. Investment decisions will be made based on the criterion of
convergence with the Fund’s strategy, estimates of the expected rate of
return, and costs and benefits.
§The list of strategic infrastructure projects was adopted at the third Three
Seas Summit in Bucharest and is a starting point in defining the strategic
infrastructure of the region. The list is an open catalogue.

Institutions that signed the letter of intent aiming to establish the Three Seas Fund- countries participating in the Three Seas InitiativeSTATISTICAL ANNEX

Methodology§ We used the Wollfers methodology (2011) to estimate the demand for infrastructure investments according to
the sectoral (widest) definition. It uses data on gross fixed capital formation (GFCF) according to the NACE twodigit industries (Nomenclature statistique des Activités économiques dans la Communauté Européenne,
statistical classification of economic activities in the European Union), including: 1) transport and storage; 2)energy, water supply and waste management; 3) telecommunications; 4) education; and 5) health. The share ofoutlays on fixed assets in these sectors in the long-term (most frequently from 2000 onwards) was estimated.
The assumption was made that the long-term investment rate should be maintained.
§ We used different data sources to estimate the demand for network investments. In the case of transport
investments, this was OECD data on investments in car, rail, water and air transport infrastructure. In the case ofinvestments in energy and telecommunications networks, we used data on gross fixed capital formation broken
down into four-digit NACE sectors. We did the same for ICT investments.
§ To estimate the demand for investments in critical regional infrastructure, we used estimates from theEuropean Commission, made for the purposes of the Connecting Facility Europe program. The total demand for
network investments in the European Union in the years until 2030 has been estimated at €1,730 billion. We
made the assumption that the ‘New’ European Union countries should maintain the infrastructure investment
rate at 140% of the investment rates for ‘Old’ members of the European Union.

Source: SpotData

38

BIBLIOGRAPHY
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§
§

"ACER Market Monitoring Report 2017 – Gas Wholesale Market Volumes”, ACER, 2018
Bhattacharya A., MeltzerJ. P., Oppenheim J., Qureshi Z., ”Delivering on Sustainable Infrastructure for Better Development
and Better Climate”, Brookings Institution, 2016
"Breaking silos: Actions to develop infrastructure as an asset class and address the information gap – An agenda for G20”,
OECD Publishing, 2017
Brzezinski I., Koranyi D., ”Completing Europe: The North-South Corridor”, Atlantic Council, 2015
"EIB Investment Report 2017/2018: From recovery to sustainable growth”, EIB, 2017
"EU: Europe needs to invest $800bn in digital infrastructure to catch up with US”, The Guardian, 2016.09.01
Haesen E., Vingerhoets P., Koper M., Georgiev I., Glenting C., Goes M., Hussy C., ”Investment needs in trans-European energy
infrastructure up to 2030 and beyond. Final Report”, Ecofys, 2018
Heather P., ”The evolution of European traded gas hubs”, Oxford Institute for Energy Studies, 2015
Inderst G., ”Private Infrastructure Finance and Investment in Europe:, EIB, 2013
"Large-scale electricity interconnection. Technology and prospects for cross-regional networks”, IEA, 2016
Novak J., Purta M., Marciniak T., Ignatowicz K., Rozenbaum K., Yearwood K., ”The Rise of Digital Challengers. How
Digitalization Can Become the New Growth Engine for Central and Eastern Europe”, McKinsey, 2018
"Proposal for a Regulation of the European Parliament and of the Councilon streamlining measures for advancing therealisation of the trans-European transportnetwork”, SWD(2018) 178 final"Report From The Commission To The European Parliament, The Council, The European Economic And Social Committee
And The Committee Of The Regions On The Mid-term Evaluation Of The Connecting Europe Facility”, COM(2018) 66 final/2"Restoring EU Competitiveness, 2016 updated version”, EIB, 2016
Subacchi p., Pickford S., Tentori D., Huang H., ”Building Growthin Europe. Innovative Financing for Infrastructure”, Chatham
House, 2014
Wagenvoort R., De Nicola C., Kappeler A., ”Infrastructure Finance in Europe: Composition, Evolution and Crisis Impact”, EIB
Papers, Vol. 15, No. 1, 2011
Woetzel J., Garemo N., Mischke J., Hjerpe M., Palter R., ”Bridging global infrastructure gaps”, McKinsey, 2016

39

40

SpotData is an analytical unit of BonnierBusiness Polska – the publisher of „Puls
Biznesu”, the leading Polish business daily.

41