China and Montenegro's expensive 'headache' due to a very dear motorway

China and Montenegro's expensive 'headache' due to a very dear motorway
The brand new highway that is funded and under construction by the state-owned China Road and Bridge Corporation (CRBC) and is planned to run from Bar to Boljare on the Serbian border, started being built in 2015. However, three years on and one before the completion of the first section (2019), tiny Montenegro is between Scylla and Charybdis...

On one hand heavily indebted to China that is financing the expensive project, on the other considering its options: leaving the project unfinished -but still obliged to pay back the huge amount of money it borrowed as a country to carry on the construction- trying to borrow even more money in order to complete its building, something that the IMF says is nearly impossible or attract private cash and make the rest of the highway a public-private partnership (PPP), in which investors recoup their money eventually through toll revenue", GCR reads, actually voicing the view of numerous specialists that follow the development of the work from close by.

The financial deadlock Montenegro is in is because of the "subsequent appreciation of the dollar pushed the cost up by 13%, so, thanks to that first difficult section, with its grand bridges and tunnels, Montenegro’s debt to China stands at around $1bn, and repayments must begin in 2021." This had not been part of the usually calculated financial risks of mega-proportion projects such as this -so badly needed and useful- motorway. "China Exim Bank provided a US-dollar-denominated loan for 85% of the cost of phase one, amounting to approximately $903m at the time, or 19% of Montenegro’s 2017 GDP."

In May 2018, however, the International Monetary Fund (IMF) did the math based on the fresh economic data, reaching the conclusion that the "phase-one highway loan will push the country's debt-to-GDP ratio to nearly 80% next year, compared to 59% had the highway stayed on the drawing board."

The IMF estimated that the additional cost for the building of the rest of the highway would be an additional $1bn with Montenegrin state authorities unable to get another grand loan and said that "fiscal space does not exist to finance the remaining phases of the highway with debt". Although nipping it in the bud would not make a handsome solution, the dead end the country is at the moment has caused a greater rift between the government and people of the opposition; the latter saw the situation as the perfect springboard that would allow them attack the present Montenegrin leadership and also ring the alarm bells telling people that the government's wrong handling could "lead the country into bankruptcy".

But is this just internal opposition "bla, bla, bla"?

Apparently it is not as an EU official who spoke to Reuters about the issue requesting anonymity said that "There is a big question about how they complete it. Their fiscal space has shrunk enormously. They have strangled themselves. And for the time being this is a highway to nowhere."

Indeed, the "Chinese loan for the first phase has sent Montenegro's debt soaring and forced the government to raise taxes, partially freeze public sector wages and end a benefit for mothers to get its finances in order", Reuters reported.

And here the situation gets worse since the CRBC signed an MoU with Serbia for a $1.8bn section of the highway on its territory, in a way obliging Montenegro to stay "loyal" to their deal while simultaneously smothering it financially.

And the bad scenario would be what U.S. company URS had written in its 2012 feasibility study (now used by Reuters in its relevant article) that was carried out for the European Investment Bank (EIB), actually depicting today's reality: "The low current traffic volumes and the weak economic forecasts mean that the economic benefits of the proposed route do not provide adequate return on the investment."

Montenegrin premier Duško Marković visited the Smokavac – Uvač – Mateševo of the Bar – Boljare route a year ago and had said he was impressed by its progress, adding that the Government will continue cherishing this partnership in order to make this project completed within the deadlines prescribed by the contract" which will be finished "at any cost" as Reuters quoted him saying, while he dismissed critics as "disbelievers".

Duško Marković (first from left) at the construction site of the Bar – Boljare motorway

The author of a 2017 study on the highway, cademic Mladen Grgic has highlighted that "This highway is a big deal in Montenegro. It reminds people of Tito and the days of grand socialist projects in the region. But it's a trap. Now that it's been started, the politicians can't stop it – no matter how harmful it might be. And frankly they don't want to."

His view of the things agrees with the stance of Montenegro's premier and even justifies it, also helping foreigners understand a bit of how state officials appreciate the situation and its dynamics, at the same time denying to realise the real potential of their small economy.... / IBNA

 

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