EBRD FINANCING IMPROVES PROSPECT OF LONG-PROMISED HIGHWAY

C O N F I D E N T I A L SECTION 01 OF 02 BRATISLAVA 000322 SIPDIS E.O. 12958: DECL: 7/20/2019 TAGS: ELTN EFIN EAID PGOV PREL CH LO SUBJECT: EBRD FINANCING IMPROVES PROSPECT OF LONG-PROMISED HIGHWAY REF: BRATISLAVA 298 BRATISLAVA 00000322 001.2 OF 002 CLASSIFIED BY: Keith A. Eddins, CDA, EXEC, DOS. REASON: 1.4 (b),(d) ¶1. (C) SUMMARY: The EBRD approved EUR 250 million in financing for the 52-kilometer R1 express highway connecting Nitra to Tekovske Nemce, one of three sections of an east-west highway project organized under a public-private partnership (PPP) concept. The EBRD's decision is a critical milestone, as private financing has proven difficult to obtain. The GOS has had to continually broaden the number of participating banks in order to piece together sufficient funds. While the majority of financing for the project will come from commercial banks, the EBRD's stamp of approval is encouraging for investors and bodes well for the two remaining sections of the highway. With the financing in order, the R1 package was approved by the GOS on July 17. END SUMMARY. -------------- GOS EXPLORED ALTERNATIVE FINANCING -------------- ¶2. (C) Prior to the decision by the EBRD's Council of Directors to approve EUR 250 million in financing, the fate of the first section of the highway connecting eastern and western Slovakia appeared to be in jeopardy. Concerned about whether or not they could piece together funds from enough commercial banks under the PPP, the GOS began exploring the possibilities of alternative financing. In the midst of the financial crisis last fall, the Ministry of Transport, Posts, and Telecommunications (MinTransport) asked the MFA to organize a meeting of Ambassadors from several large local Embassies, including the U.S., UK, Japan, China, and Russia. Officials from the Section for Public-Private Partnerships at MinTransport later explained the meeting's purpose was two-fold. Worried that private lenders would reduce their commitments, the GOS hoped the national governments of private lenders (particularly the U.S., UK, and Japan) could encourage investment in the highway project. As a back-up measure, MinTransport hoped to tap alternative resources, such as sovereign wealth funds, lest Prime Minister Fico's promise to deliver a highway during his administration be threatened by insufficient private financing. -------------- CHINA WAS READY -------------- ¶3. (C) Following the MFA solicitation, the Chinese appeared to indicate a strong interest in the highway projects. In the months leading up to a high-profile June 2009 visit from Chinese President Hu Jintao, PM Fico specifically pointed to Chinese assistance in highway construction as a possible area for bilateral cooperation. Reportedly, Chinese involvement broke down when Juraj Siroky, the controversial majority shareholder of the Slovak construction company VAHOSTAV, felt threatened by the prospect of Chinese involvement beyond mere financing (reftel). -------------- STATE INVESTMENT AND EU FUNDS ALSO EXPLORED -------------- ¶4. (C) Desperate to deliver a highway, the GOS also discussed the possibility of increasing state involvement or utilizing EU structural funds. Facing a budget deficit nearing six percent (twice the Maastricht treaty limit),the GOS was reluctant on the former, and, out of a desire to move forward on the ambitious timetable laid out by Fico, resistant on the latter (the opposition claims EU funds were more likely rejected because of stringent transparency requirements). ¶5. (C) The EBRD's decision ended both the exploration for alternative financing on the R1 section and the final financing dispute with commercial lenders. Up to that point, the private banks had insisted on an underpinning in which the state would cover the contractor's loans with sureties of up to 90 percent (up from 85 percent). Assured by the EBRD's decision, MinTransport said commercial lenders finally dropped this demand in exchange for a higher loan rate, clearing the way for a complete R1 financial package. -------------- INTEGRITY CONCERNS ON R1 NOW FOCUSED ON D1 -------------- ¶6. (C) Initially, the EBRD Country Director for Slovakia, Francois Lecavalier (PROTECT),had integrity concerns on funding the R1 portion. One of the early participants in the French-led Vinci consortium known as GRANVIA, the winning R1 bidder, was ABN Amrop Highway. ABN was reportedly a special purpose vehicle for ECOINVEST's Milan Filo, a "politically exposed" BRATISLAVA 00000322 002.2 OF 002 (Lecavalier's words) businessman with strong ties to the leading party of the government coalition, SMER (to be fair, Lecavalier notes his ties to all previous governments and whoever is in power). Filo's participation did not lead to an automatic rejection by the EBRD, and Filo appeared to cooperate with EBRD officials. The department charged with integrity compliance for the EBRD cleared the project proposal even when Filo was involved. EBRD's hesitancy to support the proposal was made easier when Filo's inability to raise enough cash forced him to sell his participation stake back to GRANVIA. Filo sold his share at the minimum price of EUR 10000, and the EBRD believes no additional concessions were made. Filo's exit from the project cleared any integrity concerns the EBRD had on the R1 proposal. ¶7. (C) With the R1 project now on its way, integrity concerns remain with the two D1 sections, a 30-kilometer stretch from Zilina to Martin and a 75-km stretch between Martin and Presov. The involvement of Juraj Siroky, a former STB secret police official who now heads VAHOSTAV construction company, could prove a stumbling block for D1 progress. While the EBRD has not ruled out Siroky's involvement wholesale, they have asked for a disclosure of beneficial ownership from VAHOSTAV to understand the structure of the company. -------------- COMMENT -------------- ¶8. (C) The GOS is a step closer to delivering a highway connecting the rural, eastern portion of the country with the more prosperous, developed western portion, a critical infrastructure investment long promised by several governments and sorely needed to advance the economic growth and integration of the entire country. The opposition has attacked the R1 highway's cost overruns and projected completion date of 2012 (two years behind Fico's initial ambitious schedule). Still, completion of the PPP project will likely set a precedent in Slovakia and the region by demonstrating that a well-structured PPP can succeed, even in a difficult financial and economic environment. END COMMENT. EDDINS