BECHTEL BEGINS TO SHUTDOWN ROAD CONSTRUCTION IN

UNCLAS SECTION 01 OF 02 BUCHAREST 001307

SIPDIS

STATE FOR EUR/NCE - WSILKWORTH, EB/IFD
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PGOV PREL RO
SUBJECT: BECHTEL BEGINS TO SHUTDOWN ROAD CONSTRUCTION IN
ABSENCE OF PAYMENTS


THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION.


1. (SBU) Summary: High-ranking Bechtel representatives
currently in Bucharest failed to obtain sufficient funds
from the GOR to cover mounting arrears on work performed on
the 2.8 billion dollar Transylvania Motorway project.
Discussions at ministerial level have provided no clear way
ahead for the short term. As a result, subcontractors were
told to shut down June 2nd and the majority of the direct-
hire work force was sent home June 3rd. This will be an
enormous story with negative implications for business
climate perceptions. Post recommends high-level and
sustained USG pressure on this important commercial issue.
A USG approach should also push for relaxation of an
extremely strict IMF deficit target that is seen by the GOR
as a barrier to needed infrastructure spending, particularly
as massive flooding in large areas of the country has
diverted substantial financial resources to relief and
reconstruction. End Summary.

Bechtel Says "Show us the Money"
--------------

2. (SBU) In the past several weeks, Post has worked closely
with Bechtel representatives to press the GOR to provide
compensation for work that Bechtel has already performed in
2004 on the Transylvania Motorway project, as well as to
provide a mechanism for timely payments for work finished or
scheduled for 2005. Current arrears stand at approximately
80 million euros. Since the current government came to
power in December 2004, only 16 million euros of payments
have been made.


3. (SBU) Despite three different potential funding sources
for the project, the GOR has experienced difficulties in
accessing any money for the project and provides it only
after Bechtel's constant prodding and then only in small
allotments. The three sources of funds that the GOR is
supposed to use for the project are:
- Internal budgetary funds. There are supposed to be 213
million euros earmarked in the 2005 Transportation Ministry
budget for the Bechtel project. Due to a (repeatedly)
delayed government budget rectification, however, the
Ministry claims it cannot release the money for work
performed. They note that there is both need for emergency
spending in the wake of widespread spring floods and claim
that the expected rectification could result in a lower
budget allocation than projected.
- U.S. Ex-Im Bank loan. Activation of this 144 million
dollar package has been delayed due to GOR nitpicking
regarding language of the letter of agreement (eighteen
revisions and counting). In addition, this loan can only be
drawn down for purchase/use of American goods and services,
a point that many in the GOR still don't seem to understand.
- External credits. The GOR must finance the rest of the
motorway through commercial loans and the GOR has been
reluctant to take on this debt, because it will count
against the IMF-mandated limits on state debt. After much
prodding from Bechtel and Post, however, the Finance
Ministry is working on a syndicated loan package for 100
million euros. This money, however, will probably only be
available, in the best of circumstances, in late July or
August.

Increasing Pressure, Increasing Frustration
--------------

4. (SBU) Post for many months has been working closely with
Bechtel representatives to get the project on track. But
just when everything seems to be working, the GOR reverts to
historic bad habits that include ignoring Bechtel's repeated
requests for meetings to discuss the project, repeating
vague assurances of payments that then do not materialize
and indulging in round-robins of blame-shifting to other
ministries or to the IMF.


5. (SBU) Post had hoped that a breakthrough had come after
President Basescu's visit to Washington this spring and his
assurances that he would support the project. Indeed, small
payments were made and some movement on outstanding issues
did occur. But another lull came later in the spring.
Similarly, Post was hopeful that the project would start
moving in the right direction after Commerce Department's
Assistant Secretary Lash, on May 12, received assurances
from President Basescu that he would work to resolve issues
related to the motorway. However, little has happened
positively since then.

Bechtel's Work Shutdown Begins
--------------

6. (SBU) With only a token payment of 10 million euros from
the Transportation Ministry in sight (enough to pay some of
Bechtel's local contractors),and after a very
unsatisfactory meeting between the Charge and Bechtel's
London-based representatives and Minister of Transportation
Dobre on June 3 (obtained only through the direct
intervention of the Embassy with the Prime Minister's
Economic Advisor),Bechtel has stopped work on the motorway
and is sending home its Romanian contractors and workers.
Subsidiaries were told to cease work yesterday, June 2nd,
while direct hire local employees were mostly told to go
home today, June 3rd. Bechtel is complying with all legal
requirements in this procedure and will continue to pay
workers three-fourths of their salary while they are in
forced work stoppage. Bechtel will perform no more roadwork
without substantial payments, although minor ancillary work
on archeological and environmental projects will continue
for the time being.


7. (SBU) Both Embassy and Bechtel urged the Transport
Ministry and earlier, the PM's economic advisor, to improve
communication between government bodies required to
coordinate on funding projects and to exercise political
will to take on board necessary external financing. In all
meetings, GOR reps eventually ducked behind the IMF,
claiming that the strict 0.7 percent of GDP deficit target
set by the IMF prevented the GOR from expensing the project
at a more rapid rate - either through straight budgetary
outlays or loans. They also noted that massive spring
flooding (still affecting parts of western Romania) made it
incumbent that the government maintains budgetary reserves
for emergency relief and infrastructure repair.

Comment
--------------

8. (SBU) The current GOR continues to behave as if Bechtel
will continue to absorb operating expenses for at least some
additional months while external credits and an EXIM loan
are put in place. Bechtel, under edict from home office,
has simply refused to play along any longer. The shut down
of the works now taking place should serve to disabuse the
GOR of the idea that the free lunch will continue
indefinitely. Bechtel needs to meet operating expenses in
order to start up again.


9. (SBU) Post recognizes that recent flooding in the
western areas of the country has caused unforeseen budgetary
strains for the GOR. Nonetheless, the chaotic nature of the
GOR's decision-making process and traditional Romanian
penchant to "put off until tomorrow what you can get away
with" indicates that only the squeaky wheel here will get
the grease.


10. (SBU) Post recommends high-level State Department and
Commerce Department intervention with the GOR to express
concern that the project is still in danger of stalling
despite assurances from the highest levels of the GOR that
the motorway contract is legal and binding. Post also
suggests that the USG should make the GOR aware of the
damage it will cause to its own image as a business-friendly
country if the motorway is stopped for even a brief time due
to inability to pay. Finally, we also recognize that the
GOR does not want to challenge the IMF with a request for
further flexibility, even though a relaxation of the deficit
target to take flooding damage into account would be a
useful means to spur the GOR to think about moving ahead
with truly desirable infrastructure projects. Post believes
that serious discussions with the IMF, by the USG and GOR,
are in order.

DELARE