Feb 19 2015

Kosovo’s pyramidal highway and remarkable generosity

Andrea Lorenzo CapusselaThe €838m Kosovo highway (which has in recent times attracted the Guardian’s and Foreign Policy’s attention) might well have been one of the most wasteful infrastructure projects in history. Andrea Lorenzo Capussela gives all the numbers: a staggering ‘€400m of the final €838m final construction cost is excess price’, equivalent to 10 per cent of Kosovo’s GDP. ‘Money paid for no reason’, he concludes, from a poor country to a rich foreign firm.

Beautiful sunset over highway that link Kosovo and Albania and river called Drini i Bardhe. Photo: Berat Hoxha/CC BY SA-3/Wikipedia Commons

Sunset over the highway that links Kosovo to Albania and river Drini i Bardhe. Photo: Berat Hoxha/CC BY SA-3/Wikipedia Commons

The pyramids hardly improved the welfare of contemporary Egyptian society and must have cost a vast amount of public revenue. Besides their immediate function, however, they probably served also to affirm the authority of the sovereign or to instil a sense of pride in its subjects. This might be true also for Kosovo’s new road. But unlike the pyramids a smooth four-lane 77 km-long grey fenced asphalt strip is unlikely to bring many tourists and foreign reserves to Kosovo four millennia from now, for it lacks their originality – there are other highways – and boldness of design.

It is true that roads are more productive objects than artificial stone hills. But this highway is less useful than it might appear. In 2010, when construction was decided, direct trade between Kosovo and Albania was very low, and Kosovo’s main import and export routes traverse Macedonia and Serbia instead. The same is true today, one year after the highway was completed. Economic integration between the two Albanian nations is certainly likely to grow, but improvements to the existing roads would have sufficed to support its evolution over the medium term, at a fraction of the cost. Indeed the highway is little used, as Foreign Policy remarks, despite still being free of charge.

Kosovo did need investment in the transport sector, but it was irrational to concentrate it on that route because the country still has only 3.6 km of roads per 1,000 residents – the average in Europe and central Asia is 8.6 – and, according to the World Bank (here, pp. 40–42), most rural roads are in ‘bad’ or ‘very bad’ condition, which harms the development of agriculture and adds to the burden of the most disadvantaged segment of the population. A highway linking it to Albania and the high seas does have undeniable geopolitical importance, for Kosovo is landlocked in a still unstable and potentially hostile region: both governments in fact explained their investment as an act of ‘patriotism’, and Kosovo’s citizens have welcomed it. But the country enjoys the explicit and reliable protection of NATO and the West, which greatly reduces the urgency of such geopolitical considerations.

The question was one of timing and sequencing, therefore. A decade or two from now this highway may prove very useful. But in 2010 Kosovo suffered levels of poverty, unemployment and infant mortality that ought to have imposed other priorities instead, such as education, health, water supply, energy supply, or indeed other parts of the transport sector. If this project had a rationale, it probably resided in the manner in which it was executed.

The procurement process was radically flawed, because bids could not be compared according to objective criteria – crucially, both variable and fixed prices were accepted – and the terms of the construction contract were negotiated after the winning bidder had been selected, when the negotiating power of the government was lowest. The tender was won by a consortium led by a large US company, with a price estimate of about €400 million. But during the subsequent negotiations the price rose by more than 60 per cent (to €659 millions). Donors had provided the government with a specialized legal adviser, who warned it that the terms proposed by the consortium were ‘not compliant’ with the tender rules, and were ‘extremely dangerous’ because ‘the apparent contract price [was] nothing more than a non-binding estimate’, liable to rise during construction through revisions, penalties and extra costs.

The seriousness of this risk was illustrated by a close precedent. In 2006 the same consortium had won the tender for the mountainous segment of the Albanian tract of the highway, with a very similar variable-price contract: the initial estimate was €418 million, but the final price reached €1 billion. Nonetheless, the government accepted the terms proposed by the consortium, with some superficial changes. And although a few weeks later it acknowledged to the IMF that the contract ‘may not adequately protect the budget from cost overruns’ (p. 38 of this IMF report), the government allowed construction to proceed for more than a year without supervision, which is a crucial safeguard – contemplated by the contract itself – precisely against the risk of unwarranted cost inflation.

The government thus made a succession of manifestly irrational choices, each of which significantly increased that risk. Supported by the IMF, the European Commission and the World Bank, the international supervisor of Kosovo – the International Civilian Office (ICO), whose economics unit I then led – had attempted to avert them. But eventually it desisted, effectively preventing anyone else from intervening.

A year later, asked by an interviewer why the ICO remained silent, the head of mission answered, ‘ask the US’. He did not elaborate further*, but both the Guardian and Foreign Policy have explored this angle and reached the following findings, which correspond entirely to my impressions: the then US ambassador supported this project, ‘lobbied’ for the consortium, and even ‘put pressure’ on Kosovo’s government to accept those ‘extremely dangerous’ (according to the government’s legal adviser) contractual terms. Shortly after leaving Kosovo, moreover, this person was hired by the US firm leading the consortium. Whatever the motives, at any rate, we may proceed upon the assumption that Washington’s representative – the most powerful diplomat in Kosovo – supported this project, whose cost exceeded the initial estimate.

The government’s acknowledgment of a possible risk of ‘cost overruns’ proved to have been a heroic understatement, in fact. Even though the length of the highway was significantly shortened, the construction price rose by a factor of 2.7: the bid by which the consortium had won the tender was €400 million (for 102 km), or €3.9 million per km; the final price was €838 million (for 77.4 km), or €10.8 million per km (this was only the price paid to the consortium: the overall cost, including expropriation and other peripheral costs, reached €1.13 billion). The final per-km construction price is between 40 and 50 per cent higher than comparable EU averages (calculated by the European Court of Auditors) and 2.5 higher than in Germany, and it seems grossly excessive for Kosovo: for instance, workers employed by the consortium, or its subcontractors, were reportedly paid only €1.35 per hour.

Let’s assume that the initial estimate (€3.9 per km) was a fair price (it seems rather high, conversely, as it is only marginally lower than average German prices, where cost levels are much higher than in Kosovo). And let’s also assume that one third of the subsequent price inflation (2.7 overall) was objectively justified. Based on these rather favourable assumptions, we can safely conclude that at least €400 million of the €838 million final construction cost is excess price: money paid for no reason.

To appreciate the scale of the problem let’s express these numbers as percentages of Kosovo’s GDP in the year when construction was decided (see the latest IMF report on Kosovo, at p. 18). The amount of public money that was misspent – i.e., the total cost (€1.13 billion) of this (for now) largely useless object – is equivalent to about 26 per cent of the 2010 GDP. The amount of money that was wasted – i.e., the €400 million excess price – is equivalent to about 10 per cent of GDP. So the pyramid parallel (parallepyramid) was perhaps less of a caricature than it might have seemed. By way of comparison, in fact, in Italy 10 per cent of GDP is equivalent to about €140 billion: and with 26 per cent of it one can probably build a second Sicily, with Greek temples, Abbasid mosques, Norman castles, baroque palaces and the rest.

Such disproportions are predominantly to be ascribed to the mistakes committed by the government in the procurement, negotiation and execution phases. And as each of such mistakes were made consciously, the most plausible explanation for them is the abuse of public office: corruption, presumably, which is likely to have influenced the very decision to undertake this project. Our interpretation must remain conjecture, however, because no direct evidence of corruption has emerged and the EU rule-of-law mission in Kosovo, Eulex, has not even opened an investigation on these matters, despite having received (from me: see § 2.1 of this paper) documents which prove that the government knew that its choices were contrary to the public interest.

To conclude, this highway illustrates very well some of the reasons why the state-building intervention in Kosovo largely failed, as I argue in a book that shall be published next month: weak legal and political accountability (the root cause of the government’s mistakes); divisions and confusion within the international community (those wielding informal power prevailed over those entrusted with formal ones); the weakness of Kosovo’s supervisors (both abdicated from their duties). So the EU and its member states, which have an interest in the long-term development of Kosovo, had to watch powerlessly as its government imposed a huge opportunity cost – namely, the more useful objects (schools, hospitals, rural roads, water pipes, etc.) that could have been built with 26 per cent of GDP – on a still poor and rather fragile country. Indeed, the most remarkable aspect of this story is that it happened in the world’s most closely supervised nation.

One last comment. Few rich people from rich countries would, if asked, refuse a €220 donation to a developing country. But few citizens of a developing country would donate any money to a rich foreigner. In Kosovo they are more generous than that: each of them made a €220 gift – the €400 million excess price divided by Kosovo’s 1.8 million resident population – to the shareholders of the consortium; and as its dominant member (Bechtel) is a privately held corporation we can assume its shareholders to be rather few and rather rich.

The gift was all the more generous on the part of the Kosovars because the recipients were far less likely to spend it in their towns (Pristina, Ferizaj, Brezovica) than elsewhere (Manhattan, Urbino, Sankt Moritz). So it is to be hoped that at least a small portion of the excess price was transferred back to Kosovo’s public officials, for they are quite likely to spend or even invest some of it where they live, thus stimulating economic development there.

* Both articles quote the head of mission (Pieter Feith) as saying that he could not intervene because the ICO lacked, or was denied, the necessary information. My recollection is different: well before the contract was signed I sent Feith the most relevant documents and a note outlining the main problems; the note bears his handwritten comments, and was the basis for a few conversations between the two of us.

Note: This article gives the views of the author, and not the position of LSEE Research on SEE, nor of the London School of Economics.

__________________________

Andrea Lorenzo Capussela has a PhD on competition policy and is a lawyer by training. After a few years in the private sector, he served as the head of the economics unit of Kosovo’s international supervisor, the International Civilian Office, in 2008–11, and as the adviser to Moldova’s economy minister and deputy prime minister, on behalf of the EU. His forthcoming book State-building in Kosovo: Democracy, EU Interests and US Influence in the Balkans, I.B. Tauris, London, will be presented at LSEE in May 2015.

 

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11 Responses to Kosovo’s pyramidal highway and remarkable generosity

  1. Hypocrite says:

    I’ve been following the situation in KS and also other articles by Capussela in which he points at EULEX failure to actually do in KS what they’re mandated to do.
    I may recall that the only one who denounced US ambassador at the time, Christopher Dell, for its direct role in all this affair, was the political subject – ‘Vetevendosje’. And, to add more to it, it is even today that the EU and the USA continue to slam Vetevendosje and, instead, favour (or help) other two parties that actually bear the fault for everything that happened and continue to happen in KS. In sum, the EU and the USA (as the ones that are in charge in KS) are collaborating with the villains and, wait…do they know it? Or, they don’t?! One thing I am sure though is that certain circles within the EU and the USA continue to get richer and richer…on the backs of those poor souls…

  2. Marko Prelec says:

    Two points. The ICR had authority, modelled after the “Bonn powers” in Bosnia, to annul any law or decision taken by the Kosovo government; to replace any official up to and including the prime minister and president; and “to take other measures, as necessary” to ensure implementation of the Ahtisaari Plan. There’s no question but that he had the authority to cancel the highway tender, right?
    Second, if – as seems to be implied by this story – the U.S. pressured Kosovo into effectively donating hundreds of millions of dollars to a wealthy U.S. corporation in exchange for continued support, it seems, well, stupid. The U.S. has invested a lot more than that in Kosovo; to undercut important things like sound governance, transparency and economic development for the sake of Bechtel seems like a bad deal even for the U.S. Or am I missing something?

  3. Andrea Lorenzo Capussela says:

    thank you Marko and Hypocrite’s

    I agree with both of Marko’s points. But I don’t share the analysis behind the second one, for it assumes that everything was intentional and imputes the intentions to one and the same decision-making centre. In other words, I don’t think that the US government, taken as a whole, decided to force that deal down Kosovo’s throat: I am more inclined to think that the highway was the result – on the side of the US government – of a string of mistakes (by the embassy, those overseeing it, etc.), which Bechtel rationally – and quite legitimately, if the mistakes were innocent ones – exploited. Indeed, in 2010 I was told – rather credibly – that Treasury people criticised the State Department people when they learnt of this deal: I suppose they were making the same point you made here: it is wrong, from the perspective of US interests, to shift 10% of Kosovo’s GDP to Bechtel’s shareholders, especially if this harms governance too. This line of analysis holds a fortiori if you conjecture that the ambassador had been bribed. The main problem, from this perspective, is that Kosovo was of too little importance for Washington to scrutinise closely what its ambassador there was doing

    So, to go back to your first point, if you move from the assumption that Kosovo’s elite is inadequate or even predatory, and hence needs supervision, you must conclude that the real proximate cause of this deal is ICO’s inaction: because nobody else had either the formal authority (IMF, World Bank, EC), the information (Washington), or the will (Kosovo’s government) to intervene. (So I share part of the responsibility: perhaps I should have done more to persuade my boss to stop it; and I was wrong to assume that the public controversy about the contract would have avoided the worst excesses: I did not think that the price would have risen so much).

    This brings me to Hypocrite’s point: yes, only Vetevendosje fought against this deal. This strengthens my conclusion about ICO’s responsibility, for it shows that the rest of the parliamentary opposition was happy about the government throwing 10% of GDP away. Odd though this might seem, I think it can be explained: as those political parties belong to Kosovo’s politico-economic elite no less than the ruling ones, the factions they represent not only projected to benefit from this deal but also had an interest in preserving the governance system that had produced it (for they also project to do their own highway when their turn will come). Hence their silence.

  4. Luca says:

    Andrea, I certainly understand your need to keep a balanced position since, due to your role at the time and your accusations in the following, you may be requested at a certain point to give evidence of any and all your statements. But when you say that what happened is the result of a lack of attention on the part of the US government towards the possible wrongdoing of his own representative, due to the minor relevance of Kosovo in US foreign policy, I am afraid I have to disagree with you. Naomi Klein, in her “The Shock Doctrine” describes quite in detail how very similar (or even grosser) events happened in other countries subject to US power, with a very good description of what happened in Iraq. Kosovo was not the first one, and would not be the last one in a tragic series. It is time we draw lines among the dots to recognise a picture, an image which is way more tragic than the simple misbehaviour of a corrupted ambassador. He just followed the path of Bremer, under the auspices of vp Cheney, in a period in which the Secretary of Defence was D. Rumsfeld. It is a system of government which cannot be declassified as an episode of embezzlement. It is the repeated pillage of resources wherever the (subjective) conditions of the public opinion and the (objective) restrictions to democracy make it possible; without any regard whatsoever for the effective consequences on already poor and depredated populations. The current situation in the middle east is providing a proof of what normally happens in the aftermath of such “shock doctrine cures”, and the same would have happened in Kosovo, hadn’t the EU (and NATO) assured a permanent (expensive) presence to keep the situation under control.

    • Andrea Lorenzo Capussela says:

      Thank you Luca: I wouldn’t rule out your interpretation, but I don’t think it is the most plausible one (including because, even assuming the worst intentions, 400m are probably not enough to influence official US policy). In addition, I would note that Eulex appears to have ignored this story: so the EU was perhaps less effective than you suggest in ‘keeping the situation under control’

  5. Seb Bytyci says:

    Great article Andrea. I think the problem is bigger and we need to review the nation building project and it’s failures, as I suggested in my latest piece at Kosovo 2.0. In my research I found that UNMIK and ICO were selective in applying their powers to prevent things going sour. So ICO is at least partly complicit in the highway story.

    • Andrea Lorenzo Capussela says:

      thank you very much. I fully agree: this is an illustration of deeper problems, in governance and state-building

  6. Robert says:

    I have one problem with the writings of Capussela. He seems rather obsessed with proving his points on Kosovo and has been prolific writer on the subject. I can imagine that well over 30 articles and few books have been written on how Kosovo is a corrupt product of the US government and more or less a failed state. He uses rather hyperbolized expressions (I recall he once called Kosovo the most corrupt country in the world since the end of WW2)
    I can’t find a similar cases of obsessed foreigners dismantling reputations of Serbia, Macedonia or any other Balkan country. Capussela’s version of Kosovo is not unsimilar to how Serbs want to paint it: a mistake or a product of corrupt, interventionist policies of the US government and inept EU institutions.

    Part of this comment was not approved as it violated our comments policy.

    • Andrea Lorenzo Capussela says:

      Thank you Robert, but isn’t your ‘you-describe-Kosovo-just-how-Serbs-want-to-paint-it’ argument contradictory?
      Let’s assume that (1) Kosovo has governance problems of non-negligible magnitude (say, smaller than Afghanistan but bigger than Finland: more or less like the rest of the Balkans), (2) these problems are an obstacle to Kosovo’s development, (3) you want Kosovo to develop, (4) to solve those governance problems they must first be exposed and diagnosed: if so, wouldn’t your aspirations be better served – whatever the (momentary) reputational cost, and whatever satisfaction this might give to ‘the Serbs’ – by exposing such problems?
      (I am not sure I said that Kosovo is ‘the most corrupt country in the world since the end of WW2’, because I have no idea which is the second most corrupt country (if I know the winner how can I not know the runner up), and which was the most corrupt before WW2 (otherwise, why would I have drawn the distinction?); I also happen to know that all available governance indicators list a few dozen countries doing worse or much worse than Kosovo)

  7. Bozo says:

    Dear Andrea,

    Just a short comment, which should be kept in mind when talking about fighting corruption with legal tools. You can have all the documents and tender violations you want. The rule is this: No eye-witness (whistleblower), no case. It really IS that simple most of the time…

    • Andrea Lorenzo Capussela says:

      Not so: there were the documents, showing the irrationality of the whole thing: and making irrational choices knowingly is what corruption is all about

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