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Upgrading Belgrade 2(2)

Serbia’s government this week unveiled billions in potential PPPs – but will institutional capital be interested?

Investor appetite for developing nations is growing – a theme visited repeatedly last week at Infrastructure Investor’s first Emerging Markets Forum. But smaller countries will only receive their slice of the institutional pie once their frameworks, sufficiently tested, are able to deliver both solid guarantees and sufficient scale.

That was underscored again this week at an event the Serbian government held in London for prospective investors.

The 7.2 million-strong nation last March elected a new government that promised sweeping reforms including privatisations, changes to labour legislation and an ambitious infrastructure upgrade. Yet the latter will most likely require the private sector – alongside DFIs – to do much of the heavy lifting: still reeling from disastrous floods that hit its energy sector hard, Serbia’s economy is expected to contract by 0.5 percent this year – putting even more pressure on the government to rein in spending.

Serbia understands this well, and that was one the key messages its officials tried to convey at its ‘Serbia Investment Day’ forum this week.

Siniša Mali, the mayor of Belgrade, used the occasion to unveil a rather impressive range of projects: a €1.2 billion metro system; a €250m waste-to-energy plant; 16 underground garages; a new main bus terminal; a €25 million new main train station; the expansion of the Suburban-Urban rail; a €182 million waste water treatment project; and the expansion of the city’s international airport, budgeted at more than €1 billion. He was eager to underline that the government would be seeking external sources of funding, largely through PPPs.

The panel that followed, focused on Serbian infrastructure, was rather optimistic that a good portion of these projects would indeed be completed – notably because some of them had already attracted funding from private financiers.

But Serbia may still have difficulty attracting fund managers and investors from the institutional world, admitted the panellists, which hailed from organisations including private equity firm Mid Europa Partners and multilateral lender the IFC. They noted that while the country had relatively advanced PPP laws, their enforcement mechanisms were rather weak and it has yet to be seen how the various projects would be integrated in practice. Another concern voiced was that most of the projects being touted were in the greenfield space, while many institutional investors prefer to invest in operating, cash-yielding assets, the panellists said.

But a number of blue-chip funds regularly invest in greenfield opportunities, and some of them have been known to target emerging markets. The main reason why institutional capital is not yet eyeing opportunities in Serbia, as emerged during conversations we had on the sidelines, is probably more straightforward: while the new initiatives are admirable, the country has yet to offer enough of a pipeline for investors to spend the time needed to understand its political, legal and regulatory frameworks.

A second, related point lies in the unrealistic return expectations this lack of specific knowledge – which leads to higher perceived risk – creates for investors. One banker operating in the region told us that, so as to account for Serbia's perceived political and regulatory risks, the projects currently on offer would have to generate returns of nearly 25 percent. This is an ambitious target for most core infrastructure assets – and a reason why the country remains firmly below the radar for most institutional fund managers and investors.

If Serbia moves to deliver both solid guarantees and can up the scale of its PPPs on offer, it may well change the status quo.