1 PlanEcon, Inc.

Accelerating Growth in Southeast Europe:The Role of Roads

Road Congress for Southeast Europe

September 18, 2000

Dr. Keith Crane

Director of Research

2 PlanEcon, Inc.

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 PlanEcon, Inc.

Southeast Europe Primarily Composed of Small Economies with Low Incomes

GDP in Billion 1995 USD

7.1

31.2

37.66.2

67.1

5.3

Albania Bosnia Bulgaria

Croatia Macedonia Romania

Per Capita GDP

0100020003000400050006000700080009000

4 PlanEcon, Inc.

After Difficult Decade, Bulgaria, Romania Recovering

-12-10-8-6-4-202468

1994 1995 1996 1997 1998 1999 2000

Annual Change in GDP (in%)

Bulgaria Macedonia RomaniaFORECAST

5 PlanEcon, Inc.

Albania, Bosnia, Experienced Very High Growth, But From Low Base

-15

-10

-5

0

5

10

15

20

1994 1995 1996 1997 1998 1999 2000

Annual Change in GDP (in%)

Albania Bosnia CroatiaFORECAST

28%68%

6 PlanEcon, Inc.

Lower Inflation Key to Recovery

FORECAST

0

50

100

150

200

250

300

350

1994 1995 1996 1997 1998 1999 2000

Average Annual Inflation Rate

Albania Bulgaria Romania

579%

7 PlanEcon, Inc.

Despite Economic Difficulties, Southeast Europeans Are Buying Cars

0

1

2

3

4

5

6

7

Mill

ion

Car

s

1992 1996 2000 2004

Car Parks

Bulgaria Croatia

Macedonia Romania

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 PlanEcon, Inc.

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 PlanEcon, Inc.

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

0

1000

2000

3000

4000

5000

6000

7000

Kil

om

ete

rs

1995 2000 2005 2010

Bulgarian Annual Driving Distances

10 PlanEcon, Inc.

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

-70

-60

-50

-40

-30

-20

-10

0

Bu

lgar

ia

Mac

ed

on

ia

Ro

man

ia

% Fall 1990 - 1996

11 PlanEcon, Inc.

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 PlanEcon, Inc.

Transport Volumes Destined to Rise Again

0

50

100

150

200

250

300

Bill

ion

Tkm

1997 2000 2003 2006

Croatia Romania

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 PlanEcon, Inc.

Exports Key Driver of Economic Growth, Transport Demand

Southeast European Exports

05000

10000

15000200002500030000

350004000045000

1995 1999 2003 2007

Mil

lio

n U

SD

Albania Bosnia Bulgaria Croatia Macedonia Romania

14 PlanEcon, Inc.

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

Bulgarian Exports

0

100

200

300

400

500

600

1997 2000 2003 2006M

illio

n U

SD

Albania Macedonia Romania

15 PlanEcon, Inc.

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

Romanian Transport

Road RailRiver PipelineSea

16 PlanEcon, Inc.

Despite Shift to Road, Southeast European Rail Still Major Player

0

5

10

15

20

25

30

35

40

45

50

Pe

rce

nt

1992 1995 1999

Share of Road in Romanian Surface Transportation 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 PlanEcon, Inc.

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 PlanEcon, Inc.

Road Haulage Going Private

0

5

10

15

20

25

30

35

40

Per

cen

t

1992 1994 1996 1998

Private Share of Romanian Truck Park

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 PlanEcon, Inc.

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

0

5000

10000

15000

20000

25000

30000

1996 1997 1998 1999

LCV Sales

Bulgaria Croatia Romania

20 PlanEcon, Inc.

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

00.5

11.5

22.5

33.5

44.5

'00

0 u

nit

s

19

96

19

98

20

00

20

02

20

04

Heavy Truck Sales

Bulgaria Romania

21 PlanEcon, Inc.

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 PlanEcon, Inc.

Old East European Makes Finally Being Scrapped

Hungarian Registrations

0

10000

20000

30000

40000

50000

60000

Barkas Csepel IFA Multicar Robur

1990 1995 1998

23 PlanEcon, Inc.

Operating Costs Rising

0

100

200

300

400

500

600

700

US

D

BUL CRO FYROM ROM

Average Monthly Wages

1997 1998 1999 2000

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 PlanEcon, Inc.

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

0

5

10

15

20

25

BUL CRO FYROM

Interest Rates in Southeastern Europe

1995 1999

25 PlanEcon, Inc.

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