Case Studies: Istrian Y Toll Motorway

Project Overview
Istrian Y Toll Motorway, Croatia
Project Type:	Both
Contract duration:	32 Years in total (28 years from phase I completion), but it is negotiated to be lengthened to 40 years
Budget:	EUR 1150- 1200 M (Estimated total project cost out of which construction and documentation costs are estimated at 630 million euro)
Project Time Line:	Tender: 1994; Contract Award: September 1995; Start of construction: 1997; Contract ends: 2027 or later (subject to recent negotiations)

Introduction

At the end of 2012 the Republic of Croatia had 1,250.7 km long motorway network, with additional 29.5 km to be completed in 2013. More than 4% of total road network of 29,410 km (at the end of 2011) are covered by motorways (figure 1). Most motorways were 2x2 driving lanes (1,182 km), while 47.9 km were 2x1 lanes and 20.8 km 2x3 driving lanes. 46 tunnels whose total length is 42 km are one of landmarks of the Croatian motorway network, with the longest tunnel of 5.8 km.

Figure 1. Motorway network in Croatia at the end of 2011

The Istrian Y (Istarski ipsilon) is a part of Croatian highway network, well-known as being the first public-private partnership in Croatia. It is called the Istrian Y because it is shaped like the letter Y, with the three stretches all intersecting at Kanfanar interchange. Istrian Y is graphically shown on the map in figure 1 with yellow line and in detail in figure 2). The Istraian Y is 141 km long (145 km with nods), comprising from:

a 64.21 km long section of the international motorway A8 from Matulji to Kanfanar and
a 76.79 km long section of the international motorway A9 connecting Slovenia over Kanfanar to Pula

The A8 branch is built as a single carriageway limited-access road, but the part between Kanfanar and Pazin was designed as a dual carriageway, with all the objects on the road prepared for a conversion to a full-profile motorway. The A9 branch between Croatian border with Slovenia and Kanfanar is a single carriageway limited-access road which is from Kanfanar to Pula a dual carriageway. The most prominent features of the Istrian Y are Učka tunnel, with its 5.4 km length being the third longest tunnel in Croatia, the viaduct Limska draga and the bridge over the river Mirna (Mirna bridge). Passage through the tunnel Učka and over the Mirna bridge has currently being tolled with 28 kuna and 14 kuna, respectively for passenger cars. Učka tunnel was opened in 1981. It is on the main road that connects the Istrian peninsula with Rijeka and the rest of Croatia. The 552 m long and at its highest pillon 120 m high viaduct Limska draga was built between 1988 and 1991. The youngest object of the three is 1,355 m long and up to 40 m high bridge Mirna, opened for traffic in 2005.

Figure 2. Istrian Y

The most important facts on the Istrian Y project are shown in table 1.

Istrian Y Toll Motorway PPP (DBFMO) Project Project Type: Brownfield • Greenfield • Both  Contract duration: 32 Years in total (28 years from phase I completion), but it is negotiated to be lengthened to 40 years Estimated budget: EUR 1150- 1200 M Estimated total project cost out of which construction and documentation costs are estimated at 630 million euro Project Time Line Tender: 1994; Contract Award: September 1995; Start of construction: 1997; Contract ends: 2027 or later (subject to recent negotiations) Table 1.Facts on the Istrian Y project

The Contracting Authority (Public Party)

The Government of Croatia, i.e. the Ministry of maritime transport, traffic and connections, whose legal follower was Ministry for public works, reconstruction and development, and then again Ministry of transport announced public tender for the award of the DBFMO contract of the Istrian Y in 1994. It was responsible for the tendering process and concession award. The Decision on awarding a concession for design, (re)construction, financing, operation and maintenance of the Istrian Y was made on September 25, 1995. At the time the contract was awarded there was no public private partnership law and the Agency for public private partnership was not established. Therefore, the governing law was the Law on concessions from 1992.

The Concessionaire (Private Party)

BINA-ISTRA d.d. (Ltd.) is a project company, established in 1995 for financing, construction and operation of phases I and II of the Istrian Y project. BINA-ISTRA is owned by: Bina-Fincom, d.d. (67%); Istarska Autocesta, d.d. (2.22%); Bouygues Travaux Publics S.A. (16%), and Hrvatske autoceste d.o.o. (14,78%). The shareholders' capital of BINA-ISTRA was 21,873,054 euro in 2003. In addition BINA-Istra Upravljanje i održavanje d.o.o. was founded in 1997 for operation and maintenance of the Istrian Y and tolls' collection. It is 100%-owned by BINA-Istra d.d. and headquartered on the tunnel Učka. This company took over Tunel Učka d.d. and its employees, i.e. the company that was in charge of tunnel Učka maintenance before the concession contracts was awarded.

Users

Istrian Y is the main road connecting Istrian peninsula with continental Croatia and neighbouring Slovenia and Italy. A section of the Istrian Y motorway connects harbours Rijeka (the third biggest city in Croatia) and Pula. The Istrian Y project is one of crucial infrastructure projects for further development of the Istrian region, which is among the economically most developed parts of Croatia. Since the Istrian Y is built on the area with few or none traffic alternatives, it is the main road for domestic and foreign individuals, commercial transport and local industry needs. The Istrain Y motorway is now connected to Rijeka – Zagreb motorway and works have started to connect Rijeka better to A1 motorway leading to the second biggest Croatian city – Split.

Since 1995 the traffic density on the Istrian Y doubled from 1,5 million passenger cars to about 3 million passenger cars per year.

Key Purpose for PPP Model Selection

The Istrian Y motorway connects 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.

At the time the concession was awarded, The war for Croatian independence has just been finished (August 1995) and Croatia had no money to invest in long postponed infrastructure development plans, such as is the project of the Istrian Y. Therefore, the only goal of the PPP model was to enable road construction across the Istrian peninsula.

Project Timing

Project idea of the Istrian Y dates back to 1970s when some parts of the single carriage road were built with public funds. Between 1970 and 1981 24 km long Matulji-Lupoglav section with tunnel Učka was built. The construction of Lupoglav-Pazin and Kanfanar-Medaki section with Limska draga viaduct was completed by 1990.

Following international public tender in 1994, concession agreement was signed between Croatian government and French company Bouygues, i. e. project company BINA-ISTRA (the concessionaire) that was established for this purpose.

The contract was signed on September 25, 1995 for design, construction, finance, operation and maintenance of full-length Istrian Y motorway. The concessionaire took over the existing 56 km of Istrian Y (from Matulji to Pazin with tunnel Učka and Kanfanar-Medaki section) on December 1, 1995. Tunnel Učka was to be refurbished and the concessionaire got an obligation to construct 85 km (90 km with intersections and ramps) of the rest of the Istrian Y. In the first phase the concessionaire was obliged to build a semi-motorway profile with one lane in each direction, and in the second phase, after the daily average traffic exceeds 10,000 passenger cars, a full-motorway profile together with the second tube of tunnel Učka.

As a refund the concessionaire got the right to cash in the tolls on the motorway for 28 years, calculated from the completion of the first phase, or for 32 years including the construction period when the tolls for tunnel Učka were cashed in. Apart from the tunnel Učka and Mirna bridge tolls, the concessionaire has a right to charge the toll on all completed four lanes’ sections of the Istrian Y. Details on construction phases are shown in table 1.

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

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 1B3 - construction, operation and maintenance of a single carriage motorway from Vodnjan to Pula 2A - construction of the dual carriage motorway on the entire Istrain Y Started in 2008 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 To be determined

Table 2.Details on Istrian Y project phases

Procurement & Contractual Structure

Tendering

International competitive procurement was carried out in 1994. Since domestic legal framework regarding public tenders was not developed at the time, scarce information is available on tendering procedure. The tendering procedure lasted for a year. The concession was awarded according to very brief Law on concessions from 1992.

Contract Structure

The concessioner was obliged to design, finance, build, reconstruct, operate and maintain the motorway. The concession contract was revised and amended on September 18, 1997 and on August 27, 1999. Key events that influenced the concession term are shown in table 3.

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 28 years following September 25, 1995 Date for entire Phase II completion has been determined 28 years following December 3, 1999

Table 3.Concession term as subject to key events from the concession contract

The design of phases 1B1, 1B2-1 and 1B3 must be completed within 24, 12 and 14 months, respectively. There are no strict dates until which the necessary conditions must be fulfilled to allow concessionaire to start with the construction of a particular construction phase. However, had the concessionaire not reached financial close one year after obtaining necessary construction permits for phase 1B3, public partner could have determined that the concession contract ends 28 years after September 25, 1995, i.e. on September 25, 2023 instead of 28 years after December 3, 1999, i.e. on September 25, 2027.

There are no exact dates for the conversion of viaduct "Limska draga", bridge Mirna and the part of eastern branch of Y from Pazin to Matulji (including Učka Tunnel) to the four-lane motorway. After the contract expires, the concessionaire should hand over the motorway to the public authorities free of charge.

The concessionaire is not obliged to pay income tax nor any road tax until the 14th year of the concession contract. The concessionaire has a right to require value added tax refund for expenditures related to concession contract fulfilment. However, the concessionaire is not obliged to pay value added tax since at the time the contract was signed there was no such tax in Croatia. The Republic of Croatia is obliged to contribute financial contribution if the expenditures of the concessionaire are higher than its revenues. The amount of financial contribution is determined at the previous year end for the next year. In case that there are excess cash on the account of the concessionaire at the end of the year, it is shared as 70:30% between the state and the concessionaire, respectively.

Following the 2A phase completion, the concessionaire is entitled to collect tolls over the entire Istrian Y except on the Matulji to Učka tunnel section.

Risk Allocation

Traffic and revenue risks were mitigated by the fact that significant toll revenue was generated by the tunnel itself. At the time the concession contract was signed, an average daily traffic was 4000 cars. Further construction should have been related to traffic intensity. To ease financial close, phase implementation of the project was projected with half-way driving motorway profile and objects for full-way motorway profile.

The initially accepted estimates of the traffic growth proved to be too conservative. As a result of higher-than-anticipated traffic growth, after just six years of the completion of phase I, the phase II had to be launched in order to upgrade the road to the full two-line highway. The increased traffic growth not only generated additional income to the concessionaire, but it also provoked unanticipated costs of sooner-than-planned highway upgrade.

The concessionaire took over earlier designs and development plans from the public partner that primarily relied on the first phase of the Istrian Y design. Prior to any construction phase, public partner needed to approve the project design. The concessionaire needed to acquire all necessary permissions for construction, namely location permit, construction permit and usage permit. The Government was responsible for 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 concessionaire was assigned the collection of tolls. Toll tariffs, however, were to be set by the government. If toll revenues are not sufficient for financing operation, maintenance or debt obligations, the public partner should pay in the difference to the concessionaire.

Risks Totally Private   Totally Public Land acquisition  Design & construction  Maintenance  Exploitation  Commercial/ revenue  Financial  Regulatory  Force majeure 

Figure 3: Risk allocation

Performance

The Republic of Croatia, i.e. Ministry of transport determines the amount of the toll on the Istrian Y. The contract can be cancelled if the public partner does not pay in financial contribution within the period of 15+15 days on notice or if it does not fulfil its obligation in the period of further three months. The State of Croatia has contributed 1.3 billion kuna (187 million euro) to the concessionaire in the form of financial contribution while the concessionaire has invested 600 million euro in construction and 100 million euro in maintenance of the Istrian Y. Financial contribution has been paid from 2000 with an average annual amount of 17 million euro and it is expected that it would be at that level until the end of the concession contract, which means that the total amount of financial contribution from the state to the concessionaire would reach almost 3.5 billion kuna until 2027. It is estimated that the concessionaire would invest additional 300 million euro in construction of the full-width motorway and 150 million euro in maintenance. Annual toll revenues are currently about 38 million euro while they are expected to be at 60 million euro until the end of concession contract.

The concessionaire pays the penalties to public partner up to maximum of 12.5% of contracted construction price for each construction phase in case of time overrun that is within the control of the concessionaire. The contracted construction price is fixed, and cost overruns can but must not be approved by the public partner. The construction works were mostly entrusted to domestic construction companies, which had a direct effect in employing domestic workforce. Due to better connection, the once abandoned area in Istria have been faced a shortage of real estate. In addition, numerous archaeological sites were discovered during the works.

The concessionaire can cancel the contract in case of severe regulatory risks. Croatian laws apply in case of any disputes between the concessionaire and the public partner.

The Istrian Y was declared as the Best European Road Deal in 1997 and 2003.

References

BINA-ISTRA, d.d., Prospekt – 210 milijuna eura / 8%, osigurane obveznice s dospijećem 2022.
Various articles from the newspapers whose content was confirmed by the Prospekt.
BINA-ISTRA – The Istrian Motorway.

Case Studies: Istrian Y Toll Motorway

Contents

Introduction

The Contracting Authority (Public Party)

The Concessionaire (Private Party)

Sponsors

Users

Key Purpose for PPP Model Selection

Project Timing

Procurement & Contractual Structure

Tendering

Contract Structure

Risk Allocation

Performance

References

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