Case Studies: Istrian Y Toll Motorway

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Project Overview
IstrianY1.png
Figure 1:Overview of Istrian Y Toll Motorway
Istrian Y Toll Motorway, Croatia
Project Type: Both
Contract duration: 32 years in total (originally 32 years for toll collection, but for reconciliation with the regulations this term was shortened to 32 years from the concession award, i.e. until September 2027)
Budget: Total project cost EUR 1,150- 1,200M (construction cost estimated at EUR 630 M)
Project Time Line
Project Conceived: 1970s
Tender Call: 1994
Contract Award: 25 September 1995
Start of construction: 1997
Contract ends: 2027
Other Important Dates (contract revision and amendment):
Phased construction was agreed 18 September 1997
The grantor got back the right to determine toll policy in exchange for paying financial contributions to the concessionaire whenever toll revenues are insufficient 27 August 1999
Approval of the refinancing of the concessionaire’s existing obligations, with the grantor returning its financial contribution if the project reaches financial stability 25 February 2003
Financing Plan for Phase 1B closed and Refinancing Plan for Phase 1A closed - Construction of Phase 1B commenced. 2003
Phase 1B completed and operational. 2006
Agreement on 90 km full profile motorway construction from Umag to Pula and from Kanfanar to Pazin 25 August 2008
Construction of Phase 2A commences 2008
End of concession 2027

Introduction

The Project entails the financing, design, construction and operation of the 145km long road network – The Istrian Y Motorway Project. At the end of 2013 the Republic of Croatia had a motorway network of 1,288 km in place with an additional 11 km to be completed in 2014. In 2013, motorways corresponded to approximately 4.8% of the total road network of 26,907 km (see Figure 2). These include 20.8km of three-lane, 1,206km of two-lane and 61.2km of single lane dual carriageways. Tunnels are a legacy of the Croatian road network: 51 tunnels with a total length of 47.3 km, the longest being 5.8 km.

The Istrian Y (Istarski Ipsilon) section is a part of Croatian motorway network, renowned as the first public-private partnership in Croatia. It is called the Istrian Y (Ipsilon) as it is shaped as the letter Y, with the three stretches all intersecting at the Kanfanar interchange (see Figure 1). The location of the Istrian Y is shown in Figure 2.


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Figure 2: Istrian Y (circled) as part of the Croatian motorway network (2011)
Source: Croatian Association of Toll Motorways Concessionaires - HUKA

The Istrian Y is 141 km long (145 km including intersections), comprising:

  • a 64.21 km section of the international motorway A8 from Matulji to Kanfanar;
  • a 76.79 km section of the international motorway A9 connecting Slovenia to Pula via Kanfanar.

The A8 branch has been built as a single lane limited-access road, but the part between Kanfanar and Pazin was designed as a dual carriageway and built so as to be able to be upgraded to a full-profile motorway. The A9 branch between the Croatian border with Slovenia and Kanfanar is a single lane limited-access road, while the section from Kanfanar to Pula has two lanes. The most prominent features of the Istrian Y are:

  • The Učka tunnel. This is the third longest tunnel in Croatia (5.4 km), opened in 1981. It is tolled, with passenger car tolls of 28 kuna (EUR 3.70)
  • The Limska Draga viaduct. This was constructed between 1988 and 1991, and is 552m long and up to 120m high.
  • The Mirna bridge, constructed over the Mirna river. The bridge is 1,355m long and 40m high. It opened to traffic in 2005, and has a passenger car toll of 14 kuna (EUR 1.90).

The Istrian Y motorway connects the Istrian Peninsula to the A8 and A9 international motorways, i.e. to continental Croatia and central Europe to the north, and Slovenia and Italy to the west. A section of the Istrian Y motorway connects the ports of Rijeka (the third biggest city in Croatia) and Pula. The Istrian Y motorway is now connected to the Rijeka–Zagreb motorway and works have started to improve the connection to the A1 motorway to Split, the second largest Croatian city. The construction of the Istrian Y was very complex as there are 16 overpasses, 28 underpasses, 15 viaducts and one bridge on the A8 motorway section while there are 32 overpasses, 27 underpasses, 3 viaducts and two bridges on A9 motorway section. The largest intersection (7 km long) is in Kanfanar. Many innovative construction solutions have been installed along the motorway.

The construction was carried out in phases. Phase 1A concerned the construction of a semi-motorway profile with one lane in each direction, and in Phase 1B, after the average daily traffic exceeded 10,000 passenger cars, a full motorway profile together with the second tube of the Učka Tunnel was to be built. Phase 2A included the construction of the dual carriage motorway on the entire Istrian Y, while Phase 2B the:

  • Construction of Rogovići-Učka-Matulji dual carriage motorway with the second tube of Učka Tunnel
  • Conversion of Limska Draga viaduct and Mirna Bridge single carriage motorway to two lanes in each direction

The Contracting Authority (Public Party)

The Government of Croatia, i.e. the Ministry of Maritime Affairs, Transport and Infrastructure, whose legal successors were the Ministry of Public Works, Reconstruction and Development, and then the Ministry of Transport announced the public tender for the award of the DBFMO contract in 1994. The Authority was responsible for the tendering process and the concession award on the basis of the 1992 Law on Concessions. The concession for the design, (re)construction, financing, operation and maintenance of the Istrian Y was awarded on September 25, 1995.

The Concessionaire (Private Party)

The concession agreement was signed between the Croatian government and the French company Bouygues on behalf of the concessionaire BINA-ISTRA. BINA-ISTRA d.d. is a project company established in 1995 for the financing, construction and operation of phases I and II of the Istrian Y project. Today, BINA-ISTRA is owned by: Bina-Fincom, d.d. (67%); Bouygues Travaux Publics S.A. (16%), Hrvatske autoceste d.o.o. (14.78%), and Istarska Autocesta, d.d. (2.22%), while at the contract award stage ownership was Bina-Fincom d.d. (67%), Istarska autocesta d.d. (17%) and Bouygues (16%). The shareholders' capital of BINA-ISTRA in 2003 was EUR 21.873M.

Bina-Istra upravljanje i održavanje d.o.o., (Bina Istra Operation and Maintenance Ltd.) was founded in 1997 for the operation and maintenance of the Istrian Y motorway and toll collection. It is 100%-owned by BINA-Istra d.d. with its head office at the Učka Tunnel. Bina-Istra upravljanje i održavanje took over Tunel Učka d.d. and its employees, who were previously in charge of maintenance on the Učka Tunnel.

Bina-Fincom d.d. is a holding company that was established in 1994 in Zagreb for developing, owning and operating infrastructure projects throughout Croatia. Bina-Fincom is the majority owner of BINA-ISTRA. Today, Bina-Fincom is owned by: Bouygues Travaux Publics S.A. (45%); Industrija Nafte d.d. (INA) (5%), Hrvatske autoceste d.o.o (Croatian Motorways Ltd.) (44%) and ICI Participations (6%). At contract award it was owned by Bouygues S.A. (51%) and INA (49%).

Both BINA-ISTRA and Bina-Fincom have their head offices in Croatia. The total (direct and indirect) share of French interest in BINA-ISTRA through the company Bouygues Travaux Publics S.A. is 50.17%, while the Republic of Croatia holds 47.6% through its stakes in Hrvatske autoceste d.o.o. and INA d.d.

Bouygues Travaux Publics S.A. was established in 1996 as a société anonyme under French regulation for a period of 99 years. It is a subsidiary of Bouygues S.A. which guarantees all of the concession contract obligations of Bouygues Travaux S.A.

INA d.d. is the largest oil and gas company in Croatia according to shareholder capital. When the concession was awarded, it was 100% owned by the Republic of Croatia. Now, the Hungarian oil & gas company MOL and other shareholders have joined the Republic of Croatia in owning INA. Its interest in motorway network development is due to its own logistics needs.

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Figure 3: Sponsors of the Istrian Y Motorway
Source: Author

Hrvatske autoceste, d.o.o. (Croatian Motorways Ltd.) is 100% owned by the Republic of Croatia. The Croatian road operator Hrvatska uprava za ceste used to operate all public roads in Croatia, but in April 2001 the company was split into Hrvatske ceste d.o.o. (Croatian Roads Ltd.) concentrating on road construction, operation and maintenance and Hrvatske autoceste d.o.o. (Croatian Motorways Ltd.) in charge of operating motorways. The latter is in charge of design, construction, maintenance, and toll collection on public motorways in Croatia.

Istarska Autocesta, d.d. (Istrian Motorway plc) was founded in 1990 by a number of Istrian public authorities (Pula, Poreč, Pazin, Buje, Umag, Labin, and Rovinj), the Croatian chamber of commerce, the county chamber of Pula, and large Croatian companies to conduct activities primarily related to the Istrian Y project and the road network through Istria.

The concessionaire assigned most of the subcontracted work to domestic construction companies. This had a direct effect on employment and the enhancement of capabilities.

The concessioner has tax exception. When the contract was signed there was no VAT tax. Now the concessioner also “gains” as VAT tax does not apply.

The roles of all of the original sponsors of the Istrian Y project are illustrated in Figure 3.

The different phases led to different models of financing. In-kind capital contribution (existing 56 km and tunnel Ucka with toll collection equipment).

  • Phase 1A: 85%/15% debt / equity ratio
  • Phase 1B: 65%/15%/20% debt / equity /public capital (combined loan and project bonds)
  • Government pays a monthly Financial Contribution (approx. € 17 million/year)

Users

Istrian Y is the main road in the Istrian Peninsula serving passenger and freight traffic. Since 1995, the traffic density on the Istrian Y has increased from 1.5m passenger cars to around 7.2m passenger cars per year in 2013. Notably, passenger traffic was underestimated. In contrast, the number of trucks is still below estimated. According to HUKA data, the number of heavy trucks on the motorway was about 626 thousand in 2012.

Key Purpose for PPP Model Selection

In 1995, Croatia was just coming out of the Independence war with a severe need to improve transport infrastructure and restricted availability of funds. Therefore, the only goal of the PPP model was to enable road construction across the Istrian peninsula to take place.

Project Timing

The need for the Istrian Y motorway dates back to 1970s when some parts of the single carriageway road were built with public funds. Between 1970 and 1981, the Matulji-Lupoglav section (24km including the Učka Tunnel) was built. The construction of the Lupoglav-Pazin and Kanfanar-Medaki sections including the Limska Draga viaduct was completed by 1990. The concession fulfilled the need to complete the motorway in several stages, as shown in Figure 4.

Project Locality and Market Geography

The Istrian Peninsula was initially an isolated region. The improved road links to major cities increased real estate demand, so Istria is now faced with a respective shortage. In addition, numerous archaeological sites were discovered during the works, providing for the development of tourism in the region.The Istrian Y motorway connects the Istrain peninsula with A8 and A9 international motorways, i.e. Istria with continental Croatia and central Europe to the north, and Istria to Slovenia and Italy to the west.

Procurement and Contractual Structure

Tendering

International competitive procurement was carried out in 1994. At the time, the national legal framework regarding public tenders was not fully developed and little information is available on the tendering procedure. The process to award took approximately one year and was based on the 1992 Law on Concessions.

Contract Structure

Following the international public tender in 1994, the concession agreement was signed between the Croatian government and the French company Bouygues on behalf of the concessionaire BINA-ISTRA. The contract signed on 25 September 1995 concerned the design, construction, finance, operation and maintenance of the full-length Istrian Y motorway. The concessionaire also took over the existing 56 km of Istrian Y motorway (the sections Matulji - Pazin including the Učka Tunnel, and Kanfanar - Medaki) on 1 December 1995.

The Učka Tunnel was to be refurbished and the concessionaire was obliged to construct the remaining 85 km of the Istrian Y motorway (90 km with intersections and ramps). Staged construction was considered. Phase 1A concerned the construction of a semi-motorway profile with one lane in each direction, and in Phase 1B, after the average daily traffic exceeded 10,000 passenger cars, a full motorway profile together with the second tube of the Učka Tunnel was to be built.

Following financial close, the construction of Phase 1A began in 1997 and was completed on 3 December 1999. The second phase (1B) was divided into three sub-phases – 1B1, 1B2-1 and 1B3. The financial close for Phase 1B, including the refinancing of debt obligations related to Phase 1A, was concluded in 2003 after which the construction of phase 1B started. The entire 1B phase became operational in 2006. Construction of phase 2A began in 2008. The details of project phasing are shown in Figure 4.

Phase Phase description Date of completion
1A
  • operation and maintenance of eastern part of the Y from Matulji to Kanfanar with tunnel Učka
  • operation and maintenance of Kanfanar-Medaki section in the western part of the Y
  • construction, operation and maintenance of Vodnjan-Kanfanar-Rogovići section in the south
December 3, 1999
1B1
  • construction, operation and maintenance of the single carriage motorway from Medaki to Nova Vas
Opened for traffic in 2006
1B2-1
  • construction, operation and maintenance of a single carriage motorway from Buje to Umag
  • reconstruction, operation and maintenance of the existing single carriage motorway from Buje to Nova Vas
Opened for traffic in 2006
1B3
  • construction, operation and maintenance of a single carriage motorway from Vodnjan to Pula
Opened for traffic in 2006
2A
  • construction of the dual carriage motorway on the entire Istrain Y
Started in 2008, 75 km from Umag to Kanfanar and from Kanfanar to Pazin opened for traffic in 2011
2B
  • construction of Rogovići-Učka-matulji dual carriage motorway with the second tube of tunnel Učka
  • conversion of viaducts Limska draga and Mirna single carriage motorway to two lanes in each direction
  • Construction started:2013: Rogovići to Tunnel Učka 2014: Rogovići to Cerovlje Estimated Completion: 2016
  • To be determined

Figure 4: Details on the Istrian Y motorway project phases

The design of Phases 1B1, 1B2-1 and 1B3 had to be completed within 24, 12 and 14 months, respectively. There were no strict dates by which the necessary conditions had to be fulfilled to allow the concessionaire to start the construction of a particular phase. In addition, there are no exact dates for the conversion of the Limska Draga viaduct, Mirna bridge and the part of eastern branch of Istrian Y motorway from Pazin to Matulji (including Učka Tunnel) into a four-lane motorway.

The concessionaire reached financial close one year after obtaining the necessary construction permits for phase 1B3 and the concession contract was determined to end 28 years following this date on 25 September 2027. On this date, the concessionaire must transfer the motorway to the public authorities free of charge.

Key event in the concession contract Concession duration
Phase 1A is completed 14 years as of December 3, 1999
Phase 1A is completed and the date for Phase 1B1 completion has been agreed 32 years from 25 September 1995 (Originally it was 32 years from the completion of Phase I.)
Date for entire Phase II completion has to be determined although Phase II construction commencement was agreed in 2008. The construction of Phase II was dependent on traffic intensity, i.e. when the average number of passenger cars reached 10,000 per day and the average number of passenger cars in the summer season was 16,000 per day. 28 years following December 3, 1999

Figure 5: Concession term in relation to key events in the concession contract

Remuneration is effected through the collection of tolls on the motorway for 28 years, calculated from the completion of the first phase, or for 32 years including the construction period. Tolls are imposed on the Učka Tunnel and Mirna Bridge. The concessionaire has a right to charge tolls on all completed four lane sections of the Istrian Y motorway, and the State is obliged to provide financial support if toll revenues are not sufficient. The amount of this financial contribution is determined at the end of each year. Excess profits are shared 70:30 between the state and the concessionaire respectively. Following the completion of phase 2A (four lanes) the concessionaire is entitled to collect tolls over the entire Istrian Y except on the Matulji to Učka Tunnel section.

State financial contribution has averaged EUR 17M p.a. since 2000, and is expected to remain at this level until the end of the contract period. Therefore, the State contribution is estimated to reach almost 3.5 billion kuna (aprox. EUR 504M) by 2027.

In addition, the concessionaire is exempt from income tax and any road tax until the 14th year of the concession, and is entitled to a refund on value added tax for expenditures related to the fulfilment of the concession. However, as no such tax existed when the contract was signed, the concessionaire is not obliged to pay value added tax.

The concession contract was revised and amended on 18 September 1997 and on 27 August 1999, as well as in 2003 and in 2008. Key events that influenced the concession term are shown in Figure 5.

Risk Allocation

A very conservative approach was followed in the development of the project. The design envisaged staged development, whereby the motorway would be upgraded depending on traffic growth. This approach facilitated financial close. Forecasts soon proved too conservative and just six years after completion of Phase 1A, Phase 1B had to be launched in order to upgrade the road to a full two-lane highway. The concessionaire took over earlier designs and development plans from the public partner that primarily relied on Phase 1A of the Istrian Y motorway design. The public partner approved project design prior to construction, while the concessionaire needed to acquire all of the necessary permits (location, construction and use).

The State was also responsible for the administration of the land acquisition process, and the transfer of land and other infrastructure required for the motorway construction as specified in the contract.

Traffic and revenue risks were largely mitigated from the start, as the Učka Tunnel and the Mirna Bridge already generated significant toll revenues. At contract award the average daily traffic was 4,000 vehicles. The initially accepted traffic growth estimates proved to be too conservative. This increased revenues, but on the other hand accelerated anticipated investment costs as well as increasing maintenance and operation costs.

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Figure 6: Risk allocation

The concessionaire was assigned responsibility for the collection of tolls. However, the Government sets tolls. If toll revenues are not sufficient to cover expenses, the State compensates for the difference.

With regard to the land acquistion risk, the Government was responsible for the land acquisition administration process and main communal infrastructure transfer from the land that was to be transferred to the concessionaire for motorway construction purpose.

The project’s risk allocation matrix is presented in Figure 6.

Performance

The Istrian Y motorway was declared to be the Best European Road Deal in 2003 by Infrastructure Journal and Project Finance Magazine.

According to estimates by the concessionaire, passage over the Mirna Bridge shortens the journey from 78.3 to 48.6 kilometres and the journey time for passenger cars from 97.6 to 26.4 minutes, while driving on the motorway shortens the travelling time from 121 to 55 minutes.

As noted earlier, the traffic forecasts have proven to be conservative. The concessionaire’s total annual revenues are currently around EUR 38M (toll revenues stood at EUR 25.6M in 2013), and are expected to rise to EUR 60M by the end of concession period. However, revenues from tolls are not sufficient to cover project costs.

To date, the State of Croatia has contributed 1.3 billion kuna (approx. EUR 187M), while the concessionaire has invested approx. EUR 600M in construction and EUR 100M in maintenance. More specifically, State financial contribution has averaged EUR 17M p.a. since 2000, and is expected remain at this level until the end of the contract period. Therefore the State contribution is estimated to reach almost 3.5 billion kuna (aprox. EUR 504M) by 2027. By then, the concessionaire will have invested an additional EUR 300M in construction of the full-width motorway and EUR 150M in maintenance.

The grantor approved an income tax grace period for Bina-Istra d.d. until September 2009. In addition since there was no value added tax at the time the concession contract was awarded, the state subsequently gave up value added tax collection on tolls for the entire concession period.

The contract includes a number of clauses protecting against non-compliance by the Republic of Croatia. The contract can be cancelled if the public partner does not make its financial contribution within a period of 15+15 days on notice, or if it does not fulfil its obligations within a further three months. The concessionaire can also cancel the contract in case of severe regulatory risks.

On the other hand, penalties up to a maximum of 12.5% of the contracted construction price for each phase are applicable to the concessionaire in the case of time overruns, which are within the concessionaire’s control. The construction price is fixed, but cost overruns may be approved by the public partner.

Since 1995, the traffic density on the Istrian Y has increased from 1.5m passenger cars to around 7.2m passenger cars per year in 2013. The observed average yearly traffic growth rate is around 7%. Notably, passenger traffic was underestimated. In contrast, the number of trucks is still below estimated. According to HUKA data, the number of heavy trucks on the motorway was about 626,000 in 2012.As traffic far exceeded forecasts, phase 1B and 2 were brought forward.

Concessionaire's total revenues are currently around 38million euro, expected to rise to 60 million euro at the end of the concession period.

Project Outcomes

It was a much needed project and traffic volumes supported this. However, the downside is that Phase 2 of the project was brought forward 18 years - hence in practice leading to a double cost of construction as the project was very quickly absolute. The following critical success factors can be considered:

  • In-kind public capital contribution and financial support mechanism made the project financially viable
  • Concessionaire successfully carried out first refinancing, thus reducing debt burden
  • Concessionaire provides subscription scheme (reduced rates) to frequent users and tries to improve its public image.
  • Public authorities are on the earning curve to improve their position during possible re-negotiations.

The project and pricing has also full acceptability.

Regarding project goals, according to estimates by the concessionaire, passage over the Mirna Bridge shortens the journey from 78.3 to 48.6 kilometres and the journey time for passenger cars from 97.6 to 26.4 minutes, while driving on the motorway shortens the travelling time from 121 to 55 minutes.

Critical failure factors are:

  • Lack of competitive procurement prevented IFIs from participating in structuring and co-financing the project; it also caused unnecessary delays and cost increases
  • Current form of government contribution provides little incentive for the concessionaire to provide services in the most cost effective manner.

Economic Impact

The project has contributed to the economic development of the region. The once isolated area is now facing a shortage of real estate, a fact partly attributed to the new motorway. It has also fostered the development of new industrial areas in its proximity, while companies are even relocating their businesses from the capital to Istria. Tourism and its associated activities are the principal drivers of the region’s economy. Given that the vast majority of tourists travel to Istria by car, the project has significantly boosted tourism, and a prolongation of the tourist season is also predicted. Finally, in 2009 Bina-Istra continued to support the construction of the local utility infrastructure of towns and municipalities neighboring the Istrian Motorway. This was realised by providing the local community municipal contribution or through direct infrastructural construction projects (such as construction and renewal of local roads).

Social Impact

The project has a positive social impact in terms of creating new jobs, increasing level of passenger safety, inter-regional and international connectivity, and in general improving quality of life. With most of transit traffic remaining on the motorway, the Istrian Y Motorway Project has contributed to the alleviation of the negative social and environmental impacts to small towns and villages that have long been exposed to such externalities. The improved access to certain towns has equally helped alleviate summer traffic jams.In addition, almost 90% of the jobs within the project will be subcontracted to Croatian companies, of which 80% to Istrian small and medium sized companies. The Project employs a total of 700 people in Istria (Concessionaire + Contractor).

Environmental Impact

  • Via directing traffic to a road with an installed drainage and wastewater treatment system, waste oils are no longer directly discharged into ground water.
  • The environmental awareness of Bina-Istra is reflected in many of its actions.

References

  • BINA-ISTRA, d.d., Prospekt – 210 milijuna eura / 8%, osigurane obveznice s dospijećem 2022. Offering Circular for EUR 210M 8% insured corporate bonds issuance.
  • Various articles from the newspapers whose content was confirmed by the Prospekt.
  • M. Grubišić Šeba, 2014, The Istrian Y Toll Motorway, in A. Roumboutsos, S. Farrell and K. Verhoest, COST Action TU1001 – Public Private Partnerships in Transport: Trends & Theory: 2014 Discussion Series: Country Profiles & Case Studies, ISBN 978-88-6922-009-8
  • Roumboutsos, A. (2015), “Ystrian Y Toll Motorway” in Łukasiewicz, A., Roumboutsos A., Liyanage C., Pantelias A., Mladenovic G., Brambilla M., Bernardino J. and Mitusch K. BENEFIT Database, Deliverable of WP6, BENEFIT Business Models for Enhancing Funding and Enabling Financing of Infrastructure in Transport, Horizon 2020, DG Research and Innovation