May 01, 2003

Czech D47 Highway Contract Collapses

Under an arrangement known as “BOT” (build, operate, transfer), a private consortium planned to build the 80 kilometers of road connecting Ostrava to the border with Poland, operate it for 30 years and then transfer it back to the government. The government would provide the operating budget through “shadow tolls” ­ per vehicle amounts paid to the private operator by the government, which subsidizes the full cost for road users.
Central European governments feel they have little choice but to entertain these kinds of public-private schemes, because they feel under the gun to get their infrastructure up to western European standards and to link up to the Trans-European Network of motorways. Of course, these projects often imply an expectation of rising to western European levels of car dependency ö levels these countries would be happy to retreat from (see story, above).

At the same time, these governments are strapped for funds that must be divided among the full range of social and economic needs, and limited by the Mastricht treaty in how much debt burden they can incur. So when the Israeli Housing and Construction (H & C) company approached key figures in the Czech administration proposing a consortium that would get the D47 project going ­ and fast ­ it was tempting. So tempting, in fact, that the government passed a special law (Article 50) that would allow such a project to go to a single provider, rather than be tendered out to a range of competing bidders, a process that would take some years.

Indeed, the lack of other bidders was key to the contract’s ultimate downfall. Since most Czech projects and services have to be given out to tender­ even a $1000 contract to supply a ministry with pencils, for example ­ the fact that this billion dollar contract went to a single company invited unceasing charges that the incentives offered by H & C to decision-makers extended beyond a plan for serving the nation’s transport needs.

The very Czech companies that might have bid for such a project raised legal questions about it. Since the project was likely tied to the graces of a particular administration, when this changed, the project didn’t stand on its own merits.

While sheer cost is not everything in a complex project whose finance spans decades, it was hard to justify a per kilometer price tag that was three times equivalent projects, including one that H & C was working on in Israel (see ST E-Update 4).

Several bidders in authentic competition would have given some basis for trusting the number H & C gave. At a recent Adam Smith Institute conference in Prague on “financing and delivering transport infrastructure projects in Europe,” there was a piece of recurring advice given to governments by some of Europe’s most savvy PPP professionals: “competition is your friend.” The D47 saga shows the dangers of ignoring this.


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