The European Union’s €672.5bn Recovery and Resilience Facility (RRF) is about to launch. Announced last year and subject to contentious negotiations on its overall volume, conditions, mechanism and financing, the plan is finally being put in motion as the European Commission readies to access financial markets for funding.
The member states, including those in Central and Eastern Europe, have now mostly drafted their national recovery and resilience plans (NRRPs) to spend the total available grants of €312.5bn and loans of €360bn, and the outlines of where the funding will land, where are the gaps and what to watch out for are drawn.
The process of drafting and finalising national recovery and resilience plans has proven to be more drawn out than the European Commission envisaged last summer. Many member states across the European Union, not only in Central and Eastern Europe, dragged out the submission of their final plans beyond the end of April deadline, which has proven to be a soft constraint rather than a hard stop for submissions.
The reasons are manifold. Member states had to meet several benchmarks and priorities, including spending 37% of funds available on green projects and 20% on digital ones. They also needed to present projects that can be realistically launched by the end of 2023 and completed by the end of 2026.
At the same time, they were juggling the second wave of COVID-19, which occupied much of the decision-makers’ bandwidth. Government instability and elections that have failed to produce new cabinets have added to this challenge.
Finally, the process has also been marred by allegations of lack of transparency at the national level and governments not taking into regard suggestions from business and civil society. Overall, most of the CEE governments submitted their plans after the deadline and two (Bulgaria and Estonia) are yet to finalise them.
Interestingly, most CEE countries that have submitted their final drafts decided to draw only partially on the available loans facilities and their plans rely mostly on the grants part of the RRF. The Czech Republic, Hungary, Latvia, Lithuania and Slovakia do not plan to draw on loans at all. Only Romania envisages drawing on loans as much as on grants, while Croatia, Poland and Slovenia balanced their plans two thirds in favour of grants, one-third loans.
This means that unless updates to these plans are envisaged, the RRF will not be used to its full potential. Moreover, the additional growth stimulus provided will also depend on the degree to which new projects have been included, rather than merely shifting existing plans from the national funding programmes to the recovery plan.
Overall, while Croatia has been allocated the largest per capita share of grants (€1,170), it is Romania that has presented by far the largest recovery plan, to the tune of €29.2bn.
Covering the basics
The digital projects under the recovery plans in the CEE focus in major part on the digitalisation of public services. Individual priorities vary depending on the existing scope of government systems and services digitalisation. For instance, the Czech Republic will spend €270mn on the digitalisation of job seekers’ services on top of the plan to digitalise government systems and services to the tune of €390mn.
The second most pronounced component of the digital plans is connectivity, which typically focuses on broadband rollout and the connectivity of businesses. Latvia, for example, plans to invest equally in the digitalisation of businesses and government services.
Digital skills improvements also figure in the plans, but to a lesser degree. Slovenia stands out in this regard, dedicating almost half of its resources in this chapter to digital skills development.
On green priorities, sustainable mobility leads in most of the national plans. Railways are to be renovated, electrified and upgraded in the Czech Republic, Hungary and Romania. Electric vehicles infrastructure features in all plans, and Croatia, Estonia and Romania add a focus on hydrogen technologies into the mix.
The energy efficiency of buildings is another high priority, which dominates, for example, green priorities in Slovak and Latvian plans. Finally, renewables, power grid renovations and adaptations, and power storage facilities are also included in all plans, but they do not dominate any of them. Instead, water and waste management take on an unexpectedly prominent role.
Overall, in the digital part of their national plans, the CEE countries focus on covering the basics rather than going visionary. They typically focus on two out of a total of four RRF digital priorities – connectivity and skills. The third priority, cybersecurity, will likely be incorporated into digital transformation projects, particularly in public administration, but the fourth one, cutting edge technologies, including high-performance computing and artificial intelligence, has not been included prominently.
Meanwhile, the green priorities of the CEE member states’ plans copy the known issues of energy efficiency and outdated infrastructure, which is not surprising given that most of these plans were developed based on existing plans for emissions reduction. The rising need for management of climate change is reflected in water management, biodiversity and other climate-related measures being included in the plan.
Yet, perhaps the most pronounced feature is the focus on sustainable mobility, which may also be the best bet to help CEE countries capitalise on the green transition. Particularly, Slovakia and the Czech Republic depend on future-proofing their automotive industries and the focus on sustainable mobility is an inevitable direction to take if they are going to make the transition from carbon to a green economy with economic gains rather than losses.
Graphic from Bruegel
Implementation is key
The next step is for the European Commission and the Council to approve the plans. The Commission has two months to assess the plans and the first approvals are expected by the end of this month. After receiving the Commission’s assessment the Council has four weeks to adopt the implementing decisions by qualified majority.
The first plans could thus be launched by the ECFIN Council by mid-July. A second batch could be approved by the end of July. However, given that only Latvia and Slovakia submitted their plans within the end of April deadline, most of the CEE countries may not have their plans approved in this first round and probably look to launch after the summer holidays.
The timing is important, as the RRF is designed to pick up where the national support programmes for COVID-19 impact mitigation gradually fade away. However, the delay over the summer months is likely to have only a limited effect.
The implementation will be the key to the success of national plans. The Commission’s RECOVER task force will review benchmarks agreed in plans and specify detailed targets and milestones in operational agreements with individual member states.
Financing will be triggered by the Commmission. The first funding, 13% of the total for each plan as pre-financing, will be made available upon the approval of the plan. The rest will follow as the Commission is satisfied that agreed targets and milestones are observed.
Timely implementation of any plan and the observance of agreed benchmarks, checked by biannual reports, may be challenged by any other member state and the matter raised at the highest level in the European Council. This can hold up matters but in the end the Commission will be responsible for the disbursement of funds.
Moreover, there is the new rule of law mechanism, much resisted by Budapest and Warsaw, which envisages a potential suspension of payments if the deficiencies in rule of law in a member state pose a risk to the Union budget. However, this mechanism is already proving contentious less than six months from its introduction and without ever being applied. Hungary and Poland are disputing its legality under the Treaty of the European Union, while the European Parliament has just passed a resolution threatening legal action against the Commission for failing to apply it.
There are also other risks to the implementation of the plans. The first is the question of the administrative capacity to distribute the substantially increased funding effectively. The risk of corruption will increase given the volume of the funding and the need to disburse it relatively fast. In many cases, the centrepieces of these plans are major public procurement projects that may add both opportunities and temptation for corruption.
Finally, there is also the risk that the green and digital transition exacerbates uneven economic growth patterns in the CEE as the investment in these two areas will likely bring disproportionately more benefits to the more developed urban areas, particularly the capital cities. The policymakers should ensure that rural areas benefit as much as possible from the projects that target digital connectivity and skills, as well as green projects, to ensure a more even distribution of economic stimulus across the less developed regions.
Otilia Dhand is a managing director at the CEO advisory firm Teneo in Brussels.