Case Studies: Horgos-Pozega, Toll Motorway Concession

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Project Overview
Horgos1.png
Figure 1. Main and regional roads in Serbia Source: Public Enterprise Roads of Serbia, 2013
Horgos-Pozega Toll Motorway Concession Project, Serbia
Project Type: Both
Contract duration: 25 Years
Budget: EUR 1200 M (Estimated total project cost out of which construction cost was EUR 800M)
Project Time Line
Tender: Oct. 2005;
Contract Award: March 2007;
Planned start of construction: April 2009;
Contract Cancelled: December 2008

Introduction

The Republic of Serbia has a road network of 40,845 km in total, of which 498 km are tolled motorways and 136 km are tolled semi-motorways.

The toll motorway project Horgos – Pozega is 323 km in total length. It included financing and construction of a new motorway section, financing and construction of the second carriageway on the existing semi-motorway section, and the take-over of an existing motorway section. The project was, hence, divided into three lots (Figure 1):

Lot 1 Belgrade (Ostruznica interchange) – Pozega: the E-763 motorway has a length of 148 km. This is the new section connecting Serbia to Montenegro and to Bosnia and Herzegovina. The package for this lot included financing, design, construction, operation and maintenance services.

Lot 2 Horgos – Novi Sad: the E-75 motorway is 107 km in length with one existing (right) carriageway. This lot included financing, design, construction, operation and maintenance of a new, left carriageway and operation and maintenance of the right carriageway.

Lot 3 Novi Sad – Belgrade (Batajnica brick factory): the E-75 motorway is 68 km in length. Lot 3 included operation and maintenance of the existing right carriageway and a newly built left carriageway.

In September 2006, prior to the tender opening, the Autonomous Province of Vojvodina officials raised the question of granting the right to the concessionaire to collect tolls on the highly profitable motorway section from Horgos to Belgrade (estimated AADT 19,000 vehicles per day), whose construction costs the citizens of Vojvodina already had paid. This section was originally financed from foreign loans between 1970 and 1988, and the province administration had paid those loans back. Thus, province officials stated that the concession was not in the interest of Vojvodina citizens.

As part of the construction financing was generated by toll collection on the brownfield section, this internal political debate weakened the project’s risk profile. In the end, Deutsche Bank suspended projects in Serbia due to the political risk increase in the country during 2008. This lead to the concessionaire’s failure to provide bank guarantees for the project. The contract was canceled at the end of 2008.

The Contracting Authority (Public Party)

The Government of Serbia announced the public tender for the award of the concession and was responsible for the tendering process. The Government appointed the Ministry of Infrastructure as the entity responsible for the procedure of concessioning. The advisor of the Public Partner was Louis Berger (France). The fact that central government held the procedure was a cause of friction with the provincial government (Vojvodina).

The tendering procedure was prepared and implanted in accordance with the 2003 Concession Law. The decision to award a concession for the construction, operation and maintenance of the Horgos-Pozega motorway was made in 2005.

The Concessionaire (Private Party)

The Spanish-Austrian consortium of FCC Construction S.A. and Alpine Mayreder Bau GmbH won the tender. FCC Construction S.A. (Spain), as a member of the winning consortium, asked the Serbian government for additional clarification before signing the contract. After the deadline for contract verification expired, FCC stepped out allowing the second best bidder, PORR (Austria), to get involved in negotiations with the government about its participation in the project. This lead to a new consortium created by Alpine Mayreder (owned by FCC) and PORR, which signed the contract for the project concession.

FCC is one of Spain’s largest construction companies and operates projects worldwide. It offers a range of services for infrastructure projects and services in the concession management area. PORR is a large international construction company and provides services in the construction, engineering and development area. Alpine is part of the FCC group and is the second largest construction company in Austria. FCC is the owner of 79,27 percent of Alpine Mayreder Bau GmbH (Austria), which formally allowed FCC to stay involved in the project. The concession contract allowed parties in the consortium to change their share and to eventually transfer it to a third party.

The SPV, Sever-Jug Autoput d.o.o., Beograd, was under joint control of FCC Construcción SA and Allgemeine Baugesellschaft - A. PORR Aktiengesellschaft

Users

Individual (national and international) users, local industry which extensively uses freight transport by road, and transport companies were the main potential users of the new motorway. The proposed motorway would have provided a fast connection for passengers and goods from western Serbia to Belgrade and northern Serbia and vice-versa. It would also have provided a better connection to Montenegro and the Adriatic coast.

Key Purpose for PPP Model Selection

The primary objective of this project was to obtain finance for Lot 1 (the Belgrade – Pozega section) and for the second carriageway in Lot 2 (Horgos – Novi Sad). Lot 3 and the existing semi-motorway section in Lot 2 were “in-kind” contributions to support the financial feasibility of the project and increase the probability of international financial institution co-financing. This was important as the State has been saturated with credit obligations and limited by the IMF in obtaining new loans, so further road projects must be financed from other sources – one of them being public private partnerships.

Project Timing

The existing two-lane road, especially in the motorway corridor of Lot 1, is extremely congested. Some sections have AADT above 15,000 vehicles per day. However, the timeline of the events leading to contract cancelation is as follows:

June 2005: The Serbian Government announced the public tender for the concession for Horgos-Pozega project.

Jan. 2007: The Spanish-Austrian consortium of FCC and Alpina was announced as the best bidder. The procedure for concessioning was delegated to the Minister of Infrastructure.

April 2007: The President of the AP Vojvodina Parliament publicly proclaimed that the Autonomous Province of Vojvodina was to revoke the Horgos-Pozega PPP contract.

March 2007: In the press, the government appeared to be delaying in delivering to the concessionaire the documentation regarding land expropriation.

Sept. 2007: The Minister of Economy suggested to the government that the PPP contract should be revoked because the concessionaire’s failure to provide bank guarantees for the entire project.

Sept. 2007: The Government of Serbia rejected the request from the concessionaire to agree to the cancelation of the contract.

Dec. 2008: The Concessionaire canceled the contract and accused the Government of Serbia of violation of the contractual provisions.

Project Locality and Market Geography

Since Serbia is not a member of the EU, the project is not included in TEN-T priorities. However, Lots 2 and 3 of the project (Horgos - Novi Sad - Belgrade) are within the European Transport Corridor X connecting Serbia, Montenegro, Hungary, Croatia, FYR Macedonia, Bulgaria, Austria and Greece. The remaining part of the project (Belgrade – Pozega) is part of the connection to Montenegro and the Adriatic coast.

Significant industry (for local market conditions) is located in northern and western parts of Serbia. There is still significant local traffic that would continue to use a non-tolled road. The new motorway would also have been used by tourists going to the Adriatic coast.

Procurement & Contractual Structure

Tendering

International competitive procurement was carried out in full compliance with international financial institutions’ requirements. A two stage tender procedure took place. The number of bidders in the first stage is unknown. The number of bidders in the second stage was four. The total procedure took 18 months.

Contract Structure

The concessionaire was to design, finance, build, operate and maintain the motorway. More specifically, the obligations with respect to the Lots were as follows:

Lot 1 Belgrade (Ostruznica interchange) – Pozega: financing, design, construction, operation and maintenance.

Lot 2 Horgos – Novi Sad: financing, design, construction, operation and maintenance (operation and maintenance of the right, existing, carriageway).

Lot 3 Novi Sad – Beograd (Batajnica brick factory): operation and maintenance.

The public sector contributed with the financing and construction of Lot 3, whose completion was financed by international financial institutions (the road was delivered by the end of 2008).

The foreseen repayment method was through user tolls. However, the private partner was obliged to pay a concession fee to the public partner during the concession period.

Risk Allocation

Risks varied depending on the section (Lot) of the motorway. With respect to design and construction works:

Lot 1 (Belgrade – Pozega) was a Greenfield type of project (148 km) and therefore design and construction risks were applicable for the whole section.

Lot 2 (Horgos – Novi Sad) (107 km) considered only the left carriageway for new construction, and therefore, these risks are partially applicable for this Lot.

Lot 3 (Novi Sad – Belgrade) (68 km) included only operation and maintenance, thus these risks were not applicable for this section.

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Figure 2: Risk allocation

In addition, the concessionaire was obliged to give priority to domestic companies for design and construction services. While maintenance risks were assigned to the concessionaire for all three sections, Lot 2 and Lot 3 were existing sections with some historical data for maintenance activities, which reduced the magnitude of this risk for the whole project. Again, the concessionaire was obligated to give priority to domestic companies for maintenance services.

The concessionaire was assigned the collection of tolls. Toll tariffs, however, were to be set by the government. Commercial risk was, therefore, shared.

Finally, the Government was responsible for the land acquisition administration process, while the concessionaire was obliged to pay the fee.

Performance

The contract was cancelled and, therefore, the project may be considered a failure. However, preparatory works included a cost-benefit analysis tested against the World Bank “Highway PPP toolkit” model software. It is considered that the traffic in the pre-feasibility study for Lot 1 (new section) seems to be significantly overestimated if compared to the current traffic on existing two lane roads within the motorway corridor for Lot 1.

References