BULGARIA signed on March 29 a contract awarding a 35-year build-operate-transfer (BOT) concession for Trakia highway that runs from Bulgaria's border with Serbia to the Black Sea coast. And while the Government was expressing its satisfaction with the agreement and the fact that it had got rid of the tough duty of maintaining one of the main transport corridors of this country, the opposition launched a fierce attack on the deal.

The deal

What was signed on March 29 in the presence of Prime Minister Simeon Saxe-Coburg was a contract with Avtomagistrala Trakia (Trakia Highway) consortium – a Bulgarian-Portuguese consortium that will take care of the highway. The signing was in pursuance of a December 17, 2004 decision of the Government to award the concession to the joint venture between three Portuguese companies (MSF-Moniz da Maia, Serra&Fortunato-Empreiteiros S.A. of Lisbon, Lena Engenharia e Contrucoes S.A. of Fatima and Somague Concessoers e Servicos S.A. of Sintra) and two state-owned Bulgarian companies (Avtomagistrali EAD and Technoexportstroy EAD).
The contract will take effect within several months, after clearance from the Competition Protection Commission and Eurostat and after contracting a loan with the banks that will finance the project, Regional development and Public Works Minister Valentin Tserovski said.
The European Investment Bank (EIB) has to allow the transfer of concession rights over a 70 kilometre stretch of the highway it financed with 100 million euro in 2000. The EU statistical office has to sanction the accounting policies of the public-private partnership deal.
The CPC has to decide on whether the Government has allowed inadmissible state aid by awarding the concession without a competitive procedure.
Trakia highway runs 443 km from Kalotina (on the Serbian border) to Bourgas (on the Black Sea) via the Sofia Ring Road (Northern Bypass), Plovdiv, Orizovo, Stara Zagora, Nova Zagora, Yambol and Karnobat. Of the total length of the highway, 182 km have been completed, and the remaining 261 km will have to be built by the concessionaire, which includes 48.1 km from Kalotina to Sofia, 22.5 km Sofia Northern Bypass, 31.8 km from Stara Zagora to Nova Zagora, 35.7 km from Nova Zagora to Yambol, and around 49 km from Yambol to Karnobat.
Construction of the new stretches will cost an average 2.7 million euro for a kilometre, the lowest price in the European Union, Tserovski said. The entire highway will have to go into operation four and a half years after the effective date of the concession contract.
The concessionaire will be required to rehabilitate the carriageway once every ten years or pay damages if more frequent repairs are required. Damages of 10 000 to 83 000 euro daily will be claimed for delay of construction.
Avtomagistrala Trakia will pay the state a concession fee aggregating 3.846 billion leva for the 35-year period of the concession, or 168 million leva annually. In addition, 706.144 million euro taxes will be paid and 3.6 million euro value added tax will be serviced through the treasury during the same period.
The first stage of the project – Sofia-Bourgas – will absorb an investment of 590 million euro, and the second stage, Kalotina-Sofia, 125 million euro, Tserovski said. The state will initially aid the project with 168 million euro, "but this money will be recovered with interest", he said. The rest of the money will come under the ISPA programme of the EU and through the loan from the EIB.
The concessionaire will be entitled to toll the highway in compliance with the Roads Act. The toll will be 2.5 euro cents for a kilometre.

The opposition

Despite the Government's satisfaction, the opposition called the contract one of the largest crimes of Bulgaria's transition and said it would challenge in court the manner of awarding the concession, which according to them demonstrated a total lack of transparency and conflict of interests.
The Union of Democratic Forces (UDF) immediately alerted Prosecutor General Nikola Filchev of what they called "an illegal deal". UDF also threatened to attack the contract before the Competition Directorate of the European Commission.
UDF spokesman and deputy leader Nikolai Mladenov said his party would also alert the European Parliament over the concession agreement. They will ask the European Commission to judge whether, under the EU requirements, this highway built with money from the ISPA programme could be granted on a concession to "a private investor of suspicious origin".
Another opposition party – Democrats for a Strong Bulgaria (DSB) – has been challenging the deal for months now, saying it would cost Bulgarian taxpayers eight billion leva for the concession period of 35 years. MPs from the DSB have seen documents pointing to such a negative result in their capacity as members of a special committee investigating the concession contract.
The total sum of money that will be paid by motorists for using the highway in the period of 35 years is a little more than eight billion leva. The sum was calculated on the basis of a forecast traffic of 25 650 cars a day.
Furthermore, the price for the construction of a single kilometre of Trakia highway would be four times higher than normal for this type of road, DSB said. Under the contract, they say, the concessionaire will invest 590 million euro in building two stretches – Stara Zagora-Karnobat and Kalotina-Sofia – of a total length of 137 km. The investment also includes a toll system to be built for the paid use of the highway.
A simple calculation shows that the price for a kilometre will be 4.3 million euro, DSB says. Strengthening their argument, research by the US Trade and Development Agency showed that the construction of a new 60 km highway stretch between Kalotina and Sofia would cost 60 million euro, which means a price of a million euro for a kilometre.
"No one can prove to me that construction of Trakia highway on private investment is something that is not good for Bulgaria," was Tserovski's answer to the criticism. "I am ready to pay any political price, even my exit from politics," he said.
He argued that the highway will be built on money of a clear origin and this will influence future infrastructure development projects in Bulgaria.
However, Tserovski avoided responding to one of the opposition's strongest arguments: that not Tserovski, but the Bulgarian citizens would be paying for any failure. Concerning the "clear origins" and the transparency of this deal; it could hardly serve as a good example of how Bulgaria treats the awarding of projects of public significance, as long as the Portuguese companies, if not suspicious, are totally unknown to the public.
Meanwhile, to fend off any attacks on the deal in Parliament, the ruling majority turned down on March 31 a motion for giving a month extension to a special committee inquiring into the concession awarding.

The after-effects

There is no doubt that Trakia highway's concession should have been awarded as soon as possible and no one in this country is questioning it. During most of the 20th century, highways, tunnels, and bridges were viewed all over the world as public goods that government must provide. By the end of the century, however, chronic budgetary problems had led governments to allow some participation of private firms in financing, building, and operating infrastructure projects. Today, concessions and all other forms of public-private partnerships are considered in most of the cases as the only way of providing the needed modern infrastructure.
The major criticism in the case with Trakia highway is based on the fact that the Cabinet has chosen the Portuguese consortium without a tender or competition, which raises doubts concerning red tape and corruption.
In legal terms, the Government has not breached any law since the concession legislation approved during the term of the previous cabinet allows for choosing road concessionaires without tenders or competition. In fact however, the public doubts the transparency of the procedure.
Tserovski said in a statement that there were no other candidates to take over the highway and pointed out that the advantages of the Portuguese offer were that the state had no financial commitments to the project as far as investments were concerned and the offered financial scheme did not require state guarantees.
Indeed, the project does not envisage that the state will invest in the motorway stretches upgrade and construction but businesses and tax payers will have to repay the EIB loan extended to Bulgaria for 70km road stretches.
Experts are concerned about whether the highway concession is financially viable. The lack of official information on the deal's parameters turned into fertile soil for all kinds of allegations about the project and put its implementation at stake even before it was launched.
The European Commission also criticised the project saying the road concession breached one of the EU directives. Under the EU directive 99/62, it is impossible to apply two road toll systems simultaneously on the territory of an EU member state – the vignette system (which Bulgaria introduced in early 2005 and where one pays for road use for a certain period of time) and the other, where vehicles are charged for each kilometre travelled.
The Cabinet overcame the discrepancy (the doubling of the road fees) specifying that the concessionaire would not collect road tolls from heavy trucks of over 12 tons but it did not seem to be enough.

Advantages and disadvantages

There is no doubt about the advantages of privatising roads. Under public provision, the government designs, finances, and operates the infrastructure project. Private firms may participate in the building stage and may even be selected in competitive auctions. But once the facility is built, the government operates and maintains it. Taxpayers pay construction costs and, even when users pay tolls, the revenues are not directly related to construction costs.
By contrast, when roads are privatised, the concessionaire finances, builds, and maintains the facility. The franchise owner collects tolls until the concession term ends, and the facility is transferred to the government – usually 20 to 30 years later (in Bulgaria's case 35 years).
World practice shows that BOT contracts can be awarded either through direct negotiation between the transit authority and an interested firm or through a competitive auction for the right to operate a well-defined project.
Road privatisation offers many potential benefits as there is no need for new taxes to finance the BOT projects. Furthermore, having the same firm in charge of construction and maintenance provides better incentives to build a road that lasts longer. Private firms usually are better at managing and more efficient than state-owned companies.
Cost-based tolls are easier to justify to the public when infrastructure providers are private. In harsh contrast to public provision, the BOT scheme uses the market mechanism instead of central planning to screen projects, which reduces the probability of red tape and corruption.
Unfortunately, the advantages of private highways are not automatic. For example, in the early 1970s, France awarded four concessions, three of which went bankrupt after the oil shock and were bailed out by the government.
Around the same time, several of the 12 highway concessions in Spain had higher costs than anticipated, while traffic was much lower than expected.
Three highways went bankrupt and the remaining contracts required renegotiation.
More recently, in the 1990s, the "private" Mexican highway concession program cost Mexican taxpayers more than $8 billion after renegotiation of the initial contracts.
Those examples illustrate a common experience and it is that most private infrastructure concession contracts are renegotiated. US research in the 1990s showed, after examining more than 1000 concession contracts awarded during the 1990s in Latin America, that within three years terms had been changed substantially in over 60 per cent of the contracts.
The frequency of renegotiation is troubling because the contractual changes often are not desirable. In some cases, renegotiations allow governments to expropriate concessionaires after they have sunk their investments. In other cases, concessionaires renegotiate contracts in order to shift losses to taxpayers.
The renegotiations thus make void the public benefits of private highways by limiting investors' risk of loss, diminishing concessionaires' incentives to be efficient and cautious in assessing project profitability, and advantaging firms with political connections.
Many of the problems with traditional highway concessions result from a combination of a front-loaded investment and substantial uncertainty about demand for the road.
Therefore, the Bulgarian Government should have been more open on granting this extremely important concession – because of the long-term threats and because of the fact that maybe not it but the next cabinet would have to handle any failure.