Highway under construction near Suhareke - F.Martino

Highway under construction near Suhareke - F.Martino

Kosovo is building a four-lane highway to connect the country with Albania: it will cost one billion Euro, 25% of Kosovo's 2010 budget. According to Andrea Capussela, former Head of the ICO economics unit, the project is financially unsustainable, marked by non-transparent procurement procedures and may end up sending the country into bankruptcy

02/12/2011 -  Andrea Lorenzo Capussela

Kosovo is building a four-lane, 105-kilometer highway that will run from its capital, Pristina, to the border with Albania where it will join a newly-built highway that goes to Tirana and the port of Durres, on the Mediterranean. At a cost that will exceed 1 billion Euros, the highway's price tag amounts to 25% of Kosovo’s 2010 GDP. Much has been written on this highway. I will argue that the highway is an unnecessary, unsound and unaffordable project that reveals fundamental weaknesses in Kosovo's management and governance.

First, trade between Kosovo and Albania is small: in the last five years, imports from Albania were on average less than three percent of Kosovo's total imports and exports to Albania were around 12% (of a very small total: exports float between 5 and 10 percent of the value of imports). Nor is the highway's route a favoured transport route: only around 5% of imports reach Kosovo from Albania: 40% goes through Macedonia, 12% through Montenegro and 11% through Serbia1. Total traffic flows show a similar pattern. In addition, the highway leads to the port of Durres and is meant to be an alternative to the route leading to the port of Thessaloniki, yet Durres is a much smaller and less efficient port and is silting up.

Economic integration between the two Albanian nations will certainly grow, and it is true that the route through Albania, unlike those through Serbia and Macedonia, faces no great geopolitical risks. Yet improvements to the existing two-lane road could have achieved the same goal at a fraction of the cost. The planned four-lane highway can wait until there is enough growth in trade and traffic to justify it. This project lacks an economic rationale and, unsurprisingly, private capital has stayed away from it.

The government undertook the project without a plan, feasibility study, or financing. The highway's name reveals the real reason behind the project: it is a "Patriotic Highway". This is an unaffordable act of patriotism, though: an agreement forged between Kosovo and the IMF in June 2010 – which Kosovo irresponsibly broke a few months later – was effectively an attempt to save Kosovo’s budget from the weight of this huge expenditure2. The attempt failed, and the fate of Kosovo’s budget remains uncertain.

In order to build this highway, the government risks a fiscal crisis and has had to cut other much-needed capital expenditures that could have been more productive. Kosovo's education system needs attention, for example, and schools operate on three or even four shifts a day. The highway is also absorbing money that should have been channeled to the private sector instead to stimulate sustainable growth. Money could have been well spent elsewhere, as Kosovo's fiscal crisis is grave: unemployment is 45% - 75% among the youth – and 45% of the population live in poverty, 13% in extreme poverty (meaning, without the minimum income needed to buy enough food to remain healthy).

The highway project has also been poorly implemented. The procurement process was seriously flawed as bidders submitted offers which could not be compared according to objective criteria. The runner-up, Austria’s Strabag, offered a 1.3 billion Euro fixed price for the whole highway (approximately 140 kilometers, running from the border with Serbia to the border with Albania), whereas the winner – a consortium formed by US’s Bechtel and a smaller Turkish company, Enka – offered a variable price for the segment running from Pristina to the Albanian border (approximately 110 kilometers). Furthermore, the construction contract was negotiated after the winning bidder had been chosen when the negotiating power of the government was lowest. In fact, during the negotiations, the estimated price of the highway rose by more than 60 percent, from about 400 to 659 million Euros3. The contract proposed by Bechtel-Enka contains very punitive clauses that were not contemplated by the tender rules.

Indeed, Kosovo’s press reported that the transaction legal advisor retained by the government – the UK law firm Eversheds – concluded that Bechtel-Enka’s offer was «not compliant» with the tender rules and amounted to «nothing more than a non-binding estimate», and advised the government against signing the contract proposed by Bechtel-Enka because it was very one-sided and «extremely dangerous». Their advice, which cost 1.7 million Euros, went ignored, and, in April 2010, the government signed the contract4.

But the Kosovo government had to show the contract to the World Bank and the IMF with which it was negotiating its program. And, a mere two months after having announced a price of 659 million Euros, the government accepted a World Bank estimate placing the total cost of the highway at at least one billion Euros – which, incidentally, brings the per-kilometer price slightly above Strabag’s bid. The price is the highest in the region and seems rather high also for EU standards5 – it could also rise much higher through design revisions, extra costs or penalties, and an acknowledgment that «the highway contract may not adequately protect the budget from cost overruns, while construction delays would trigger non-negligible penalties and cost increases6.

With such a contract, the final price is effectively up to Bechtel-Enka’s own discretion on, for instance, how much gravel, asphalt or cement will (reasonably) be needed, or how difficult the terrain will prove to be. For this reason, the contract stipulates that the government is entitled to closely supervise the construction work to check – for instance – how much cement is needed, of what quality and at what cost, and how much is actually used. Yet, while work on the highway began in April 2010, only in August 2011 did the government hire a company to supervise the works7. The Kosovo press has reported that, in the meanwhile, the government might have been overcharged for cement8.

So, how high the price will rise is a matter of speculation. Bechtel reminds one of the controversial Iraq contracts, but I will mention two much closer and very relevant precedents about the dangers posed by open-price, cost-plus contracts awarded in a non-competitive manner.

Bechtel-Enka built part of the Albanian segment of the highway under a very similar open-price contract. The initial estimate was 418 million Euros and the final price was close to one billion, which is believed to imply a rather exceptional 44% profit margin. A cable from the US embassy in Tirana dated 22 September 20069, sent shortly after Bechtel-Enka won the tender, states that «the World Bank (WB) considers the selection process […] non-competitive and is pressuring [Albania’s ministry of transport] to re-tender. The WB also wants the [ministry] to re-specify the project as a two-lane instead of a four-lane highway to reduce costs». These are the same problems that emerged four years later in Kosovo: irregular procurement processes and excessive cost.

The cable, which is titled «Impediment To Bechtel Bid To Build Key Section Of Highway Between Kosovo And Durres», ends with the embassy concluding that they «ought to work with the [Albanian government] to help resolve whatever objections the World Bank might have». This is what they did, presumably, and they were successful.

Another cable dated 27 June 200810 reports that the transport minister who had signed the highway contract and three officials were accused of having «bypassed legal procedures to get the project underway» (the corruption investigation on the highway was subsequently closed and then re-opened11; it is presumably still pending), that «the initial cost estimate of 450 million Euros has long since been surpassed», and, more precisely, that Albania «has so far invested 640 million Euros, and it is estimated that the cost may shoot up to as high as 800 million Euros». Like Kosovo, Albania did no feasibility study on the highway, has had trouble meeting costs, and recently declared that it doesn’t have the capacity to maintain the project12.

Bechtel also secured the contract for a 415-kilometer highway in Romania, this time without even a public tender. As of last August, 54 kilometers had been constructed and the government had paid Bechtel 1.3 billion Euros. The prime minister under whose watch the contract was signed is on trial for corruption, and the new government took years to renegotiate the contract and cut its losses. The deal is that Bechtel will build 60 more kilometers at a price of 3.8 billion Euros, and the rest of the highway will be tendered again13.

Unlike Albania and Romania, however, Kosovo was and still is under international supervision.

Its supervisor – the International Civilian Office (ICO), led by Mr. Pieter Feith, who was then also the EU Special Representative in Kosovo – has very broad corrective powers and a mandate that also covers economic and fiscal policy (at that time, I led the economics unit of ICO). At the same time, the EU has also sent to Kosovo a rule-of-law mission, EULEX, which also has executive powers to fight high-level corruption.

The IMF, the European Commission and the World Bank had serious concerns about the highway and raised them with the government. I shared those concerns, and several times discussed them with my direct interlocutor, Kosovo’s economy and finance minister. But it soon became apparent that the government was taking little note of such criticism, and I asked Mr. Feith to take a strong stance with the prime minister.

Indeed, as I conceded to Mr. Feith, the highway had been decided on by a democratically-elected government and Kosovo’s population was enthusiastic about it. But this project was not only economically unsound and fiscally unsustainable: the procurement process had been irregular, the contract represented a serious risk for public finances, and the government was ignoring its own transaction advisor. These were good reasons to, at the very least, check on whether the government was negotiating in the interest of its citizens.

Mr. Feith didn’t follow my advice. The reason was explained in an interview he gave on 7 July to Kosovo’s main newspaper. Asked whether he was aware of the highway contract and its problems, Mr. Feith answerd «I wasn’t aware.» (my note on the contract bears his handwritten comments). Asked «Why not?», he answered «Ask the US.».

So, the US – be it Washington, the embassy, Bechtel or others – persuaded him not to interfere while the Kosovo government was about to spend a colossal amount of money on an unnecessary highway tendered to Bechtel in a controversial manner. The parallel with the Albanian case above is obvious. Indeed, I had had the impression that the US embassy was encouraging the government to sign that dangerous contract, but my perception – confirmed by Kosovo’s economy minister – was that the pressure came more from the embassy than from Washington (which, by the way, has reportedly and very wisely decided to remove the current ambassador).

There have been rumors about corruption involving the transport minister and the prime minister, and the Serbian media also recently launched (unsubstantiated) allegations against the US ambassador14. I sent a dossier to EULEX more than a year ago, but the opening of an investigation hasn’t been announced. Another current investigation covers dozens of road-building projects, but not this one.

What matters, in the end, is that the poorest state of Europe has wasted money amounting to perhaps to 10 or 15% of its GDP, faces a fiscal crisis, and nobody was able to protect the interests of its citizens: not the opposition, the mainstream media, which reacted feebly and very late, or Kosovo’s supervisors.

This episode show the depth and the extent of US influence on Kosovo. Of course, Kosovo and most Kosovars owe a lot of gratitude to the US, but they don’t seem to notice that, for all it did, the US has not spent 10% of its GDP for Kosovo. Contrary to what the US ambassador said at the highway contract signing ceremony, this contract is not a symbol of the friendship between Kosovo and the US15.

And it shows that the ICO has become a dépendance of the US embassy, which uses it as an instrument to pursue its bilateral interests under the guise of the ICO’s multilateral mandate. Incidentally, it seems odd that twenty-four other states would finance and support it, and that the European Commission would continue to pay more than half of its budget.

To conclude, a word on Bechtel and another highway. It is clear that, for Becthel-Enka, the Albanian and the Kosovo highways were one and the same thing: once the machinery was in motion in Albania, Bechtel tried to do what it could to also secure the Kosovo contract. This reduced its costs and gave it an edge over most competitors. Regrettably, Kosovo seems not to have benefited from these cost savings, as the selection process wasn’t very competitive.

Now Kosovo plans to build a 55-kilometer highway to Skopje, in Macedonia. It pledged to the IMF to postpone it until it will be able to afford it without adding strain to its budget, but the prime minister reportedly intends to proceed as soon as work finishes on the current highway, despite the IMF’s objections16. Clearly, Becthel-Enka have every intention to tender for this highway, and time is of the essence for them. The shorter the delay between the end of one project and the start of the next one, the greater the cost savings.

The government of Kosovo would definitely benefit from closer supervision and prudent advice as it faces its decision as to whether and when to build a second expensive highway.



1Trade statistics are here: http://esk.rks-gov.net/ENG/publikimet/cat_view/10-economic-statistics/14-external-trade-statistics ; questions on the economics of the highway are also here: http://policyinstitute.eu/eng/publications/kosovos_new_highway_and_prospects_for_economic_growth/

2Here: http://www.imf.org/external/pubs/ft/scr/2010/cr10245.pdf

3See Pristina Insight n. 64 pages 1 and 2

4Here: http://www.balkaninsight.com/en/article/kosovo-spurned-legal-advice-on-dangerous-highway-deal see also Pristina Insight n. 64 pages 1 and 2

5Here: http://www.balkaninsight.com/en/article/kosovo-s-new-highway-the-most-expensive-in-region see also: http://ec.europa.eu/transport/sustainable/studies/doc/2008_road_infrastructure_costs_and_revenues.pdf

6Here: http://www.imf.org/external/pubs/ft/scr/2010/cr10245.pdf ; see also: http://www.imf.org/external/pubs/ft/scr/2011/cr11210.pdf

7Here: http://www.balkaninsight.com/en/article/italians-waiting-to-sign-the-contract-in-kosovo and

8Here: http://www.balkaninsight.com/en/article/kosovo-press-review-may-aa7-2%C3%A5aaaa

9Here: http://www.cablegatesearch.net/cable.php?id=06TIRANA995

10Here: http://www.cablegatesearch.net/cable.php?id=08TIRANA487

11Here: http://www.balkaninsight.com/en/article/albania-kosovo-road-corruption-case-reopened ; on the cost see: http://www.balkaninsight.com/en/article/albania-panned-over-kosovo-road-loan

12Here: http://www.balkaninsight.com/en/article/albania-plans-tolls-for-kosovo-highway

13Here: http://www.economist.com/blogs/easternapproaches/2011/08/romanian-roads

14Here: http://www.b92.net/eng/news/politics-article.php?yyyy=2011&mm=09&dd=15&nav_id=76409

15Here: http://www.unmikonline.org/dpi/localmed.nsf/0/505F28EC4758B85BC1257704002C9A7B/$FILE/lmm130410.pdf

16Here: www.unmikonline.org/Headlines/Headlines%20-%2011.10.2011.doc on the IMF program, see http://www.imf.org/external/pubs/ft/scr/2011/cr11210.pdf

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