Photo: HAC/Croatian Motorways
The state of Croatia’s road sector poses a unique challenge compared with more typical World Bank projects where road assets either need to be developed or require significant rehabilitation. If you've ever had the chance to experience Croatian roads you'll quickly realize the country has a well-developed motorway and state road network, in relatively good condition. This begs the question: how can the World Bank help improve a sector with already high-quality assets in a middle-income country like Croatia?
By 2014, their debt was consolidated into the general government debt. These liabilities amounted to approximately 11 percent of GDP in 2015, and could not be supported by the revenue generated by the companies. The combined outstanding debt of public road companies at the end of 2016 was the equivalent of €5.2 billion. Even more alarming, most of this debt was due in the next two to five years—a “wall of debt,” so to speak.
The World Bank spent a long time with the Croatian government identifying the issues and determining the skills necessary to tackle them. They were then tasked with figuring out a solution to a series of complex problems that were impacting the ability of the road companies to manage their operations, overall government indebtedness, and ultimately the long-term quality of the road assets. Not easy for a modest team to undertake!
The World Bank put its best foot forward with a team experienced in road assets, road company operations, financial structuring, and financial modeling, allowing us to tackle the problems both from the perspective of sector operations and reprofiling of the debt itself.
. The International Bank for Reconstruction and Development (IBRD) is supporting this through a €22 million technical assistance loan to the government alongside support from the European Bank for Reconstruction and Development (EBRD).
The sector work underpinned a three-pronged financial solution that included an immediate refinancing of loans through sovereign financing; a reprofiling of the remaining loans to extend the maturity; and a second refinancing for residual loans. The financial solution benefited from a €350 million IBRD guarantee, available to facilitate long-term, affordable financing if and as needed. The dovetailing of sector policy reforms and financial reprofiling was critical: an improved debt profile for the road companies would be insufficient if the underlying operational issues constraining the companies and the sector were not addressed.
The project is led by the Ministry of Sea, Transport, and Infrastructure, as well as the Ministry of Finance, in coordination with the road companies.
One of the true measures of success is the way each of these counterparts work together. On the technical side, joint ministry-company teams (facilitated by the World Bank) not only helped define the content of reform and technical assistance, but are also monitoring the achievement of operational objectives and indicators. On the financial side, with their financial advisor, the ministries worked closely with the three state-owned road companies to come up with a strategy, coordinate the timing of the refinancing, as well as negotiate with existing road company lenders so the funding would come in at the right time—while keeping in mind Croatia’s plans to access the markets.
A sovereign bond to support the refinancing of the road sector was issued in November 2017 for €1.275 billion, and the debt reprofiling work completed in March 2018 with a €1.8 billion jumbo loan at the level of the road companies. Given the improvement in the Croatian economy at the time, and favorable market conditions in Europe, the guarantee has not been required, conserving Croatia’s IBRD envelope.
Since the beginning of project implementation, the road and motorway companies have improved their operating efficiencies with further progress expected to continue through 2021. These improvements will not only improve the operations of the companies, but also the experience of road users—with an efficient toll collection system, better traffic flows, and improved maintenance throughout the road network.
This is a . The guarantee remains available for any future refinancing of residual loans.
Sometimes the solutions lie not in the balance sheet strength of the World Bank, but in knowledge and skills. When combined with client commitment, good advisors, and strong working relationships, remarkable results can follow.
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