BOSNIA: EBRD ATTEMPTS TO REVIVE THE 5C CORRIDOR

UNCLAS SECTION 01 OF 03 SARAJEVO 001685

SIPDIS

STATE FOR EUR/SCE HYLAND, FOOKS, STINCHCOMB

E.O. 12958: N/A
TAGS: ECON EINV BK
SUBJECT: BOSNIA: EBRD ATTEMPTS TO REVIVE THE 5C CORRIDOR
HIGHWAY

REF: 07 SARAJEVO 1759


1. SUMMARY: The European Bank for Reconstruction and
Development (EBRD) has devised a plan to kick start the
Corridor 5C highway project in the Federation. Although
traditional EBRD loans coordinate primarily with state
officials and require sovereign backing and guarantees to
repay the loan, EBRD is focusing first on the Federation.
Four new sections of the highway, totaling 67 kilometers,
will all run through Federation territory. Because of the
necessity for a state guarantee, EBRD mandated that a
10-pfennig/liter gas tax be levied by the State-level
government,s Indirect Taxation Authority. However, only the
Federation will use its portion, estimated at 100 million
KM/annually, to pay back the EBRD loan and to provide
maintenance. The RS will be allowed to use its proceeds for
other motorway infrastructure projects. Although EBRD,s
strategy supports RS motives to work independently from the
Federation, it was likely the only way to get the highway
project started, and ensure the necessary RS approval for the
state-level funding. END SUMMARY


2. Recently, Econoffs met with several Federation officials,
EBRD officials and the head of local engineering and
consulting firm, IPSA, for an update on the Corridor 5C
project, a portion of the European plan to upgrade
transportation networks through Southeastern Europe (reftel).
The meetings were in conjunction with the visit of
Bechtel,s Senior Vice President Charles Redmond (former U.S.
Ambassador to Germany) to Sarajevo to see if there are any
realistic opportunities for Bechtel in the 5C project.
(Note. Bechtel noted at the meetings it is not interested in
smaller scale, segmented projects and will likely not bid
unless 5C is funded and offered as a single project. End
note.) The section designated on European Union projected
highway maps as 5C runs from Budapest, Hungary, to the
Adriatic port of Ploce in Croatia. The Bosnian portion of
the highway runs from Svilaj (on the border with Croatia)
through Zenica, Sarajevo, Mostar, and south to the Croatian
border opposite Ploce. The route is approximately 335km
long. The project has floundered for years because of RS
Premier Dodik,s refusal to take part in a State-level
project or to agree to State-level comprehensive legislation
on highways. Compounding the problem is the inability of
Bosnian officials to gain serious interest from possible
foreign investors for a concession to build the entire
project.

EBRD PLANS FOR 5C CORRIDOR CONSTRUCTION
--------------


3. Despite prior IMF opposition to Bosnia accepting
additional debt to finance road construction (reftel),on
October 28, Bosnian State authorities signed a contract with
EBRD worth 180 million Euros to finance a portion of the 5C
corridor. These funds, in addition to 300 million Euros from
the European Investment Bank (EIB),(negotiations are
underway) will fund four segments of the 5C corridor totaling
67 kilometers. EBRD is also projecting a 125 million Euro
contribution from the Federation Motorway Directorate for a
total of approximately 605 million Euros to complete the four
sections. Plans are to have these segments completed by

2012. This would comprise 20 percent of the total 5C
corridor. EBRD hopes to have construction started by the
summer of 2009 on at least one 15.9 kilometer segment between
Kakanj and Zenica.


4. EBRD officials explained that their strategy is to move
toward a concession in stages. First, (nearly completed as
noted below) was the 30 kilometers from Sarajevo to Kakanj
funded directly from the Federation budget. The new plan for
four additional segments will be funded by the EBRD and EIB
but backed by sovereign guarantee. The EBRD hopes that the
completion of the four segments and the ensuing toll revenue
will finally attract a concession investor. The EBRD has
also not given up on eventual participation from the RS for
the roughly 60 kilometers of the project that will go through
the RS. One EBRD official noted that the often-announced RS
two billion Euro deal with Austrian construction firm Strabag
will likely fail because the current financial troubles of
Strabag,s 30% owner Russian oligarch Oleg Deripaska will
prevent Strabag from living up to its investment promises.


PAYING OFF THE EBRD LOAN?
--------------


5. Although technically a country must provide state
guarantees for repayment of EBRD loans, it appears that this
recent EBRD loan will actually be repaid by the Federation.

SARAJEVO 00001685 002 OF 003


Evidence of this is the point of contact for the loan, the
Federation Minister of Transport,s Motorway Directorate.
Part of the agreement with the EBRD was to have a 10
pfennig/liter (equivalent to 5 Euro cents) gas excise tax to
help finance repayment of the loan. The EBRD is somewhat
vague on what State-level legislation will be needed, but
passing a gas excise tax will require the RS and Federation
politicians in the State Parliament to consent to passage.
Although we heard varying estimates, the gas tax should
collect approximately 40 million Euros for motorway
construction in the Federation alone. The tax must go
towards motorway construction, but the RS will not be
expected to use its proceeds to pay back the EBRD loan, as
the financed portions will not run through the RS.

FEDERATION-FINANCED PORTION NEARING COMPLETION AFTER TWO YEARS
-------------- --------------


6. Construction of 37 km of road from Sarajevo north to
Kakanj is nearing completion after almost two years under
construction. The Federation financed this portion directly
from its budget, explained the Minister of Transport,
Seckanovic, as they saw this as the easiest portion without
tunnels. The cost will total 200 million KM or approximately
100 million Euros once it is complete; 60 million KM will
come out of this year,s budget. According to IPSA President
Esref Gacanin, four local companies with previous road
building experience won the tender to build this section of
the road. Revenue from the existing toll road, however, also
goes directly into the Federation budget and is worth
approximately 12 million KM annually. When the Kakanj
section is complete, the Federation plans to raise the toll
rates and will draw double the amount of revenue. According
to Seckanovic, 50 percent of the revenue will go towards new
roads and the remainder toward maintenance of existing roads.


OTHER PLANS GET SHORT SHRIFT WITH BOSNIAN OFFICIALS
-------------- --------------


7. Ambassador Redmond reminded the Bosnian officials of
Bechtel,s previous attempts to work with the country to find
financing for the entire highway, versus working piecemeal.
He used the example of Albania, which used 800 billion Euros
of sovereign financing and made their highways a top priority
of the central budget. They completed many miles of highways
in the shortest amount of time when using their own financing
and internationally-recognized infrastructure companies.
Bechtel finished 60 kilometers of road in Albania, for
example, while the World Bank-financed portion of 9
kilometers is still pending.

OTHER PLAYERS IN THE 5C GAME
--------------


8. In a separate move, the Federation also issued a
statement of interest in April 2008 for construction of the
Mostar-Sarajevo portion in a public-private partnership
(PPP). The 67 km portion of tolled highway, from Sarajevo to
Zenica that is already partly complete would be used by the
Government as collateral for the project. The contractor
would be given access to toll revenues on the existing
highway for a defined amount of time. According to
Seckanovic, 11 international companies expressed interest.
However, according to Federation Minister of Finance Bevanda,
many Federation politicians still do not favor PPP,s, so
this attempt will likely not bear fruit.


9. Federation Minister of Transportation Seckanovic also
noted ongoing discussions with the Japanese investment agency
JBIC to finance some of the more difficult portions of the
road, including the new tunnels. JBIC has offered them a
less than 1 percent interest loan for a term of 30-40 years,
with the obligation that they use Japanese construction
firms. He said they are still in discussions with them.

COMMENT
--------------


10. Hopefully the energetic attitude of EBRD officials to
get the 5C Corridor project moving will have some positive
results. There is still a chance that negotiations with the
EIB for the additional 300 million Euros will fall through.
In that case, the Federation may not have enough funds to
complete the four small sections. It is difficult if not
impossible to foresee a scenario, however, where a
country-wide highway infrastructure strategy will be
implemented by present-day BiH officials in this fractured
political landscape. It can be argued that the EBRD,s
strategy to at least get some momentum on the project by

SARAJEVO 00001685 003 OF 003


working with the Federation vindicates the RS refusal to join
in a country-wide approach. EBRD,s move, however was likely
the only way to move forward. Nonetheless, if the RS-Strabag
agreement fails, even the RS may be persuaded to join the
project. In any event, construction of the four additional
highway segments could turn out to be an important economic
stimulus for the Bosnian economy.
CEFKIN