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.

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GOS EXPLORED ALTERNATIVE FINANCING
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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.

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CHINA WAS READY
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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).

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STATE INVESTMENT AND EU FUNDS ALSO EXPLORED
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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.

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INTEGRITY CONCERNS ON R1 NOW FOCUSED ON D1
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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.

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COMMENT
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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