Taxpayers lose twice as development projects stall

It was a chilly November morning in Glogonj, a sleepy village about an hour’s drive from Belgrade known for cabbage cultivation – and arsenic in its water supply.

Villagers were filling bottles and canisters at a water truck in front of the local community center, a daily ritual since last June when the yellow-red water from household taps was declared unfit to drink.

“Before we got the cistern, we used to buy water,” said Boban Mitic, as he took his turn filling bottles. “Now we partly buy and partly drink this.”

Since then a public drinking fountain has been installed as a temporary solution, but the tap water is still contaminated.

Glogonj’s toxic water is just one of many infrastructure woes across Serbia and Bosnia and Herzegovina that authorities have promised to fix using loans from international development banks and some governments.

As with many of the other loans, the money hasn’t been fully spent, problems remain unsolved and taxpayers are paying a double price.

Once for not getting the services they need.

And twice for fees levied by banks on loans not used on time.

Between the beginning of 2008 and June 30 2015, Serbia spent €35.2 million in fees for unused loans while Bosnia paid €12.4 million, according to research by the Center for Investigative Journalism of Serbia (CINS). The CINS chose the almost eight-year period to get a critical mass of data to assess the extent of money unnecessary wasted on fees.

That €47.6 million could buy around 35.8 million meals for poor people at public kitchens in Belgrade – or keep the main soup kitchen in Tuzla in Bosnia open for 44 years, according to running costs estimated by the charities and authorities.

“It’s a waste of money”, said Erol Mujanovic, an economic analyst from Bosnia, adding that high fees were a sign of reckless borrowing by authorities unable – or unwilling – to implement projects.

“We go back to politics or corruption. Or both.”

All about commitment

Glogonj is a microcosm of many of the inefficiencies plaguing public projects in the Balkans.

The village is in the municipality of Pancevo and problem with water supply was supposed to be solved with the loan from Germany’s KfW Development Bank – €25 million was intended to clean up local water and sewerage systems in mid-sized municipalities in Serbia. Pancevo got €3 million.

Under the contract’s terms, the funds should be fully drawn down by the end of 2016. Yet by the end of last June, only half of the money had been spent and Serbia had paid €286,000 in fees for the unused part of the loan.

The charges were so-called commitment fees that are typical of many development loans. The size of fees depends mostly on the amount borrowed and pace at which funds are spent. Since projects usually take place in stages, money is withdrawn in phases. Commitment fees are charged for unused parts of the loan. If money is not used on time more fees are paid. These fees come on top of normal interest charged.

In Glogonj’s case, the project was dogged by delays from the beginning.

Management of the public utility company in charge of cleaning up the water supply changed six times since 2010. Property disputes thwarted construction of a proposed new reservoir, with which the project should have begun.

“We have given up on construction of the new reservoir because it was concluded that we have made so much progress in reducing consumption and rationalization of production between 2005 and 2015 (…) that the general project is no longer applicable,” said Aleksandar Radulovic, who was manager of Public Utility Company Water Supply and Sanitation Pancevo until July 2011, and reappointed last September.

Radulovic says that frequent changes in management could have slowed the project, but not significantly.

Economists cite a raft of reasons why Serbia and Bosnia are late in carrying out important infrastructure projects: creaking administration; lumbering procurement procedures; inadequate project documentation; political interference in technical matters; poor planning; difficulty expropriating land; limited control over contractors; and general delays in meeting deadlines.

“Commitment fee is a necessary harm, you cannot avoid it”, said Edin Tokic from the Ministry of Finance and Treasury of Bosnia and Herzegovina. He adds that there are not many ways to come up with the funds for infrastructure projects, so the state has to accept the rules of the creditors.

Svitlana Pyrkalo, a spokeswoman for the European Bank for Reconstruction and Development (EBRD), said the fees were a normal part of doing business with development banks since the lending institutions have to cover operating costs.

Creditors that levy commitment fees include the EBRD, Germany’s KfW, Austria’s Raiffeisen Bank and governments of some countries.

“These fees do create an incentive to the client, in this case governments, to utilise the funding in a timely manner,” Pyrkalo said.

Money for nothing

Such incentives clearly failed in parts of Serbia and Bosnia, where unemployment rates are 18 percent and 28 percent, respectively, and gross domestic product is among Europe’s lowest.

CINS reporters filed freedom of information requests to Bosnian and Serbian financial institutions, analyzed hundreds of pages of public records, and found that in dozens of cases authorities were late implementing infrastructure projects, often due to poor planning.

The result was far higher commitment fees than needed in a part of Europe where every euro, dinar and mark counts.

Roads, power plants, waterworks, education, health, rail transport, agriculture – fees for unused loans have hit all sectors.

During 2013 and 2014, €268,463 of commitment fees were paid for the construction of Sarajevo roundabout, Photo: CINS

In both Serbia and Bosnia, the bulk of fees on unused loans have come from transport infrastructure projects.

Between the beginning of 2009 and the end of 2014, Bosnia paid €5.79 million in fees for six road construction projects – about 1.44% of the total value of loans for the road works.

Over the past seven and a half years, Serbia has paid more than €13 million in fees for nine roads construction projects – about 1.1% of the loans’ worth.

Osman Lindov, a professor at the Faculty of Transport and Communication of the University of Sarajevo, said Bosnia had enough money for infrastructure projects, but institutions do not implement them because the people in charge, which are not prepared and competent enough, do not realize that without good traffic communication there is no serious economic development.

Delays in construction of Bosnia’s Corridor Vc, a north-south motorway, cost €3.76 million in fees. Implementation of an EBRD loan of €205 million started in 2009. The money was supposed to be used by 2012, but the deadline was extended for two more years.

Public company Highways of Federation was in charge of implementing the loan. The company has only existed since 2011. In a written reply to CINS, it said the fact it had previously been only a directorate within the Ministry of Transport and Communications slowed things down when it came to withdrawing the money.

Corridor Vc is part of an international highway network and construction of the Bosnian stretch has been fraught with problems. The project was set in motion before the precise route had even been finalized. On one section of the corridor, the main contractor was changed three times.

Since 2013, the Prosecutors’ Office of Bosnia and Herzegovina has been investigating the payment of fees and failure to use loans for roads construction, primarily Corridor Vc. The Prosecutors’ Office declined to answer questions on the status of the investigation.

One of the sections of Corridor 10 in Serbia, Photo: CINS

Meanwhile in southern Serbia, more than €3 million in fees have been paid on unused funds from a €150 million EBRD loan to build Corridor 10, stretching from Nis to Dimitrovgrad. The contract was signed in September 2009 and the funds are to be withdrawn by the end of 2016. By last June, only a third of the money had been used.

According to a 2015 report by the Fiscal Council of Serbia, an independent state body that oversees Serbian fiscal policy, roadblocks to highway construction include inefficient public procurement and problems acquiring land.

“The fact that the penalties for non-use of loans are paid mean that all taxpayers pay for the failures of state institutions”, said Vladimir Vuckovic, a member of the Fiscal Council.

Politics trump pragmatics

In the Federation of Bosnia and Herzegovina, one of two Bosnian entities, during the campaign crescendo for upcoming elections in late 2010, then President Borjana Kristo, who was also a leader of the Croatian Democratic Union party, laid the foundation stone for the construction of a wind power plant, near the southwestern village of Mesihovina.

Borjana Kristo at the ceremony of laying the foundation stone for the Mesihovina wind power plant, Photo: Tomislavgrad.gov.ba

A loan of €71 million was taken from KwF and state-owned Public Enterprise Power Industry of Croatian Community Herceg Bosna was in charge of implementing the project. The funds were planned to be withdrawn by the end of 2013 but was postponed twice. The project is now due for completion by the end of 2017.

Overlapping jurisdictions at various levels of power, slow bureaucracy and the sheer weight of paperwork required by different institutions – all are common in Bosnia and may help explain the delay. For example, authorities only chose the equipment supplier in March.

The wind power plant had racked up €768,000 in fees by the end of 2014 – without a single wind turbine in sight.
Asked about the delay, the company declined to comment.

In Serbia, part of a €150 million EBRD loan to state-owned gas company Srbijagas was supposed to be used to build a gas storage facility in the northeastern town of Itebej. But the project has been on hold for years because of problems expropriating land and property disputes, according to a 2015 Fiscal Council report on public investments.

The storage facility was supposed to be a part of the South Stream gas pipeline, an abandoned project to transport gas from Russia to the Balkans and further afield to Austria. Until Russia pulled the plug on the scheme in 2014, Serbian authorities had practically based energy policy on the pipeline.

In the meantime, Serbia has had to pay a little more than €2.5 million for not using the loan.

Vuckovic from the Fiscal Council said contracting loans is the easy part; problems occur when money has to be invested and results achieved. He added that failures existed in Serbia at all levels and in all phases of project implementation.

He blamed “improper, unprofessional and overall non-credible behavior and lack of accountability for taken obligations.”

Back in Glogonj, as authorities dither over how to clean up the arsenic-heavy water supply, residents are forced to find their own solutions. Residents say they had problems with water supply even before it was officially declared contaminated.

Arsenic is one of the ten chemicals that the World Health Organization ranks among the greatest dangers to public health. They describe it as extremely toxic and note that long-term use of water with high concentrations of arsenic can cause cancer and skin lesions, even death. It has also been associated with cardiovascular disease and diabetes.

Mitar Djakovski’s family had drunk the tap water until his granddaughter started getting stomach pains. Since then, they have relied heavily on bottled water, which was a burden to their budget, as he said.

A 1,5 liter bottle of water costs slightly less than half a euro in Serbia, a strain on the household budget in country where the average wage is €360 but many earn less.

“During summer, there were days I had to buy six liters of water three times per day,” said Djakovski.

The story was made possible by funding from the Robert Bosch Stiftung and Thomson Reuters Foundation