State looks to private sector for highway

SLOVAKIA will soon invite investors to bid for its most ambitious road infrastructure project ever: building 151 kilometres of highways and dual carriageways.
This will be the first time Slovakia uses the Public Private Partnership (PPP) model for financing highway construction. The government has turned to PPP to make sure that the long-promised cross-country highway is finished by 2012.

SLOVAKIA will soon invite investors to bid for its most ambitious road infrastructure project ever: building 151 kilometres of highways and dual carriageways.

This will be the first time Slovakia uses the Public Private Partnership (PPP) model for financing highway construction. The government has turned to PPP to make sure that the long-promised cross-country highway is finished by 2012.

The construction of the whole network of highways and speedways to connect Bratislava with Košice could not be financed solely from public funds and European Union money, the Transportation Ministry said.

"A motivated private partner is able to build the road infrastructure faster and more effectively, and operate it through the whole lifespan of the project," reads an official document of the Transportation Ministry.

The ministry wants private investors to pour funds into the construction of specific highway and speedway sections: the D1 highway from Hričovské Podhradie to Ivachnová, Jánovce to Jablonov, and Fričovce to Svinia; and the R1 dual carriageway from Nitra to Selenec, and Selenec to Tekovské Nemce.

Those sections should be partially completed by 2010, while the most complicated stretches, such as tunnels, should be finished two years later, Prime Minister Robert Fico and Transport Minister Ľubomír Vážny confirmed on September 5.

The project advisor, the Mott MacDonald company, prepared a feasibility study on the project. It said the selected sections are doable through PPP projects.

The advisor estimated the costs of the project at Sk105 billion (€3.1 billion) without VAT in current prices. But costs might increase by eight to 10 percent each year due to inflation on construction materials.

Slovakia would start paying off its debt to private investors in 2011 at the earliest, said Vážny. The settlement schedule means the country would likely pay Sk7-10 billion annually for 25 years.

The Transportation Ministry is to sign the contracts with the contractor in the name of the state, while the National Highway Company will play a major role in the procurement process, the preparation of construction and the monitoring of the contracts.

"The key is that the potential private partners and all the financing bodies have secured an adequate protection of their interests during the whole range of the contract, which in Slovakia's case is for 25 to 30 years," reads the official document of the Transportation Ministry.

Pluses and minuses

Observers say that the project has its risks and advantages. Any flaws in the tender and the contracts will have serious consequences that future governments will pay for.

"It is a very ambitious project, mainly because Slovakia is doing it for the first time," the director of the Transportation Research Institute in Žilina, Ľubomír Palčák, told The Slovak Spectator. "It is a huge package of money."

The main advantage is that the state is using private resources at a time when there is a substantial lack of money available for highway construction, Palčák said. Also, the state is not burdening its budget immediately, but distributing the burden for a longer time period, he added.

The EU Eurostat regulation from February 2004 defines three types of risks that countries must analyse so that PPP financial obligations aren't included in their state debt: construction risks, the risk of making the highway operable and accessible, and the risk of demand, which is the volume of traffic.

If the potential builder takes over at least two of these three major risks, then the costs are not added to the state debt, Palčák said. If that is the case, the construction would not derail the country's budget plans.

"If the conditions [of the contracts] are well tuned, the process can be more effective because the contractor is building the highway to make a profit," Palčák told The Slovak Spectator. "If the contracts, for example, say that the payments will be made only if the infrastructure has the necessary quality, the contractor will have a much greater interest in providing higher quality work.

"Also, the investors are naturally interested in quality because they will operate the highway for many more years, and it is in their interest to have minimal costs for operation and maintenance."

One downside is that all the deals involved in some PPP projects are actually long-term contracts, experts say. The more risks the state tries to shift to the contractor, higher the costs will be, because the contractor will calculate the risks into the price of the highway, Palčák said.

"It is absolutely crucial to ensure complete transparency during the selection of the contractor, because only a transparent and competitive environment can push the price down," he added.

The biggest risk for the state is obtaining the construction license and the land itself in a timely way, the Transport Ministry wrote.

However, Slovakia has not yet created all the legislation needed for the process. The government must make changes to the public procurement law, and finish writing a law on the expropriation of land intended for the highway construction.

The Transportation Research Institute has calculated the effects of the investment. They suggest that with an investment of Sk100 billion into highways, for example, the direct benefits could be doubled or tripled in lower fuel consumption, reduced transportation time, development in the regions, and using the potential of remote regions.

Tenders and bidders

The ministry plans announce two tenders. The first one will cover six sections of the D1 highway and two sections of the R1 speedway. The investors are expected to sign their contract by next May.

The second tender will pertain to three sections of D1 around Žilina. That tender is planned to be announced next year.

Three of the country's five major road construction firms - Doprastav, Skanska and Inžinierske Stavby - have already indicated their interest in the project. However, Palčák expects that most of them will form consortiums that will involve financial institutions and development firms.

But Doprastav's interest is still hypothetical because the company is waiting for more detailed information on the project criteria before they make a definitive decision, Ivan Šesták, head of the company's board of directors, told The Slovak Spectator.

Skanska has said it is definitely interested in the project. The company has already been involved in PPP projects in other countries like Great Britain, USA and Scandinavian countries.

Skanska is confident that private companies have their advantages in this process.

"A private contractor is more flexible in the planning process and has experienced and trained project managers," Magdaléna Dobišová, Skanska's external affairs specialist, told The Slovak Spectator. "The private contractor has an imminent interest in meeting the construction deadline, or even an earlier completion of the project, because each PPP project has a clearly-defined deadline and sanctions if there is any violation of the contract or failure to meet deadlines."

Both the project advisor and observers have said that the firms participating in the PPP projects might have to outsource labour from countries where it's more affordable. But with a highway construction surge in Slovakia's neighbouring countries, the lack of labour might become a challenge.

Meanwhile, the Slovak Cabinet has passed a document that makes it clear that the cross-country highway will not be finished by 2010. The ministry suggested 2012 as a realistic deadline.

Earlier this year, Slovak media reported that the prime minister promised to have the highway completed by the end of 2010.

Fico has since emphasised that speeding up highway construction cannot threaten the country's chances of meeting the Maastricht criteria for euro adoption in 2009, the SITA newswire wrote.

He denied press reports that his government is backing down from its plan to finish the highway by 2010.

"There is again a picture being created that the government is giving up its plan or that it does not fulfill its promises," Fico told SITA. "It surprises me a little bit, because the government's agenda statement says the government is ready to create conditions by the end of the election term for opening 100 kilometres of highways and dual carriageways."

With files from Marta Ďurianová

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