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Road to Ruin

An unnecessary highway in Kosovo could bankrupt Europe’s poorest state.

by Andrea Lorenzo Capussela 13 January 2012

Kosovo is building a four-lane highway that will stretch for about 105 kilometers (65 miles) from the capital city of Pristina south to the border with Albania, where it will join a newly built highway to Tirana and the Adriatic port of Durres. The project is estimated to cost more than 1 billion euros, or 25 percent of Kosovo’s 2010 GDP.

 

Much has been written on this unnecessary and unaffordable highway, which reveals fundamental weaknesses in Kosovo’s governance and international supervision.

 

Workers prepare a southern segment of the highway, near the border with Albania.

 

There is no discernible economic rationale for this project, dubbed the “Patriotic Highway.” Trade between Kosovo and Albania is minimal: according to the national statistics office, in the last five years less than 3 percent of Kosovo’s imports came from Albania, and around 12 percent of its (few) exports were sent there. Nor is it a favored transport route: only around 5 percent of imports reach Kosovo via Albania, and total traffic flow follows a similar pattern. The link to Durres is intended to attract trade that now flows through the Greek port of Thessaloniki, but the Albanian port is much smaller and prone to silting up.

 

Economic integration between ethnically connected Albania and Kosovo will certainly grow. But that integration could have been boosted by improvements to the existing two-lane road, at a fraction of the cost. Little wonder that private investors steered clear.

 

The government undertook the highway without having planned it, studied its feasibility, or lined up the financing. The only reason for building it lies in its name: it is an act of patriotism.

 

And an unaffordable one: the program that Kosovo agreed to with the IMF in June 2010 was effectively an attempt to save Kosovo’s budget from the weight of this huge expenditure. The attempt failed, and the fate of the budget remains uncertain.

 

In deciding to build this highway, the government risks a fiscal crisis. It has had to cut other much-needed and more productive capital expenditure – in the failing education system, for instance. The project is also absorbing money that could have been channeled to the private sector instead, to stimulate sustainable growth.

 

To underline the gravity of all this, recall that in Kosovo unemployment is 45 percent, 75 percent among the youth, and that 45 percent of its people live in poverty, 13 percent in extreme poverty – they can’t afford to buy enough food to stay healthy.

 

This project was also badly implemented, starting with a seriously flawed procurement process in which the bids 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, from the border with Serbia to the border with Albania), whereas the winner – a consortium formed by the U.S.-based Bechtel corporation and a smaller Turkish company, Enka – offered a variable price for the segment running from Pristina to the Albanian border.

 

In addition, the construction contract was negotiated after the winning bidder had been chosen, when the negotiating power of the government was lowest. Indeed, during negotiations the estimated price rose by more than 60 percent, from about 400 million to 659 million euros, and the contract proposed by Bechtel-Enka contains very punitive clauses for the government that were not envisioned in the tender rules, according to an analysis by the Pristina Insight newspaper (no link available).

 

Indeed, the transaction adviser retained by the government, the UK law firm Eversheds, deemed the Bechtel-Enka contract “not compliant” with the tender rules, one-sided, “extremely dangerous,” and “nothing more than a non-binding estimate.”

 

The firm’s advice, which cost a reported 1.7 million euros, was ignored and in April 2010 the agreement was signed.

 

But during negotiations for assistance, Pristina had to show the contract to the IMF and World Bank. And a mere two months after having announced a price of 659 million euros, the government accepted a World Bank estimate of at least 1 billion euros for the highway’s total cost – slightly above the per-kilometer price of Strabag’s bid, and subject to increase through design revisions, extra costs, or penalties. In fact, a few weeks after signing the contract, the government acknowledged in a memorandum to the IMF that “the highway contract may not adequately protect the budget from cost overruns, while construction delays would trigger non-negligible penalties and cost increases.”

 

With such a contract, the final price effectively depends on Bechtel-Enka’s judgment on, for instance, how much gravel, asphalt, or cement will be needed, or how difficult the terrain proves to be. For that reason, the contract provides that the government can closely supervise the construction works, to check, for example, how much cement is needed, how much is actually used, of what quality and at what cost. Yet while work began in April 2010, it was only in August 2011 that the government hired a company to supervise it. In the meantime, Kosovo’s press reported, the government might have been overcharged for cement.

 

So how high the price will rise is a matter of speculation, and the precedents are not encouraging.

 

Bechtel-Enka also built part of the Albanian segment of the highway, under a similar open-price contract. The initial estimate was 418 million euros; the final price, close to 1 billion. Like Kosovo, Albania did no feasibility study on the highway and is having trouble meeting its cost. Tirana recently declared that it doesn’t have the capacity to maintain the road.

 

In Romania, Bechtel won the 2004 contract for a 415-kilometer highway, this time without a public tender. As of August, 54 kilometers had been constructed at a cost of 1.3 billion euros, nearly 60 percent of the budget for the entire project. The government took years to renegotiate the contract and eventually cut its losses. In a revised deal, Bechtel will build 60 more kilometers and be paid of a total of 3.8 billion euros. The rest of the highway will be tendered again.

 

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

 

Its supervisor – the International Civilian Office, led by Pieter Feith, who at the time of the tender was also the EU Special Representative in Kosovo – has broad authority that includes economic and fiscal matters. In parallel, the EU has 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. As director of the ICO’s economics unit, I shared those concerns and discussed them several times with Kosovo’s economy and finance minister. When it became clear that the government was taking little note of such criticism, I asked Feith to take a strong stance with the prime minister.

 

There were good reasons to check, at the very least, whether the government was negotiating in the interest of its citizens.

 

Feith didn’t intervene. In a July interview with Kosovo’s leading newspaper, he said he had not been aware of the problems surrounding the highway contract, although my note on the contract bears his handwritten comments. Asked “Why not?” he answered, “Ask the U.S.,” without explaining who – be it Washington, the embassy, Bechtel, or others – either kept him in the dark or persuaded him not to intervene while the Kosovo government was about to spend a colossal amount of money on an unnecessary highway tendered to Bechtel in a controversial manner.

 

Shortly after the contract was signed I outlined my doubts to EULEX, because corruption would seem a plausible explanation for several of its oddities. But there is no sign that the issue has been investigated.

 

What matters, in the end, is that what is arguably Europe’s poorest state has wasted hundreds of millions of euros and risks a fiscal crisis. And that nobody was able to protect the interests of its citizens – not the opposition; not the mainstream media, which reacted feebly and very late; not even the country’s international supervisors, whose presence is justified precisely by the weakness of other safeguards.

 

The government was left free to make a huge, self-serving mistake without fear of legal, social, or political sanction. The international supervision of Kosovo may not have been the best solution to the problems it was meant to address but if it cannot be improved, it ought to be discontinued: a silent, ineffective supervisor only damages Kosovo. 

 

Andrea Lorenzo Capussela is former director of the International Civilian Office’s economic and fiscal affairs unit in Kosovo. Photos from the website of the Kosovo prime minister.
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