Andrea Lorenzo Capussela: High priced highway: Worth the cost?

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Kosovo has built a highway to Albania costing more than 25% of one year’s GDP. Its per-km cost is between 40 and 50 percent higher than the comparable EU averages calculated by the European Court of Auditors, and 2.5 times higher than in Germany. This is grossly excessive for Kosovo, a rather flat country with low labour costs.

Andrea Lorenzo Capussela is an Expert in Competition Policy, State Building and Corruption. 7 October 2014,   Cross-posted from Kosovo 2.0 

The highway to Albania cost more than 25 percent of Kosovo’s GDP in the year when construction was decided. This object, I argued elsewhere, has no economic rationale. And Kosovo was ripped off. Its per-km cost is between 40 and 50 percent higher than the comparable EU averages calculated by the European Court of Auditors, and 2.5 times higher than in Germany. This is grossly excessive for Kosovo, a rather flat country with low labour costs: workers employed by the consortium, or its subcontractors, were reportedly paid only €1.35 per hour.

Even more striking is that the price payable to the consortium rose by a factor of 2.7 between tender and completion: the tender bid 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. That was only the price paid to the consortium, however: the overall cost, including expropriation and other peripheral costs, was €1.13 billion. That is 26.33 percent of the 2010 GDP (on both numbers, see the latest IMF report, at p. 18). Considering both this steep price inflation and the comparison with EU average construction prices, we can conclude that at the very least €400 million (about 10 per cent of the 2010 GDP) is excess price: money paid for no reason, in other words, wasted money. To round up, therefore, 25 percent of GDP was misspent, and 10 percent thrown away.

Kosovo’s government knew that there was no economic rationale in building that highway at that time; everyone told them: IMF, World Bank, European Commission, ICO (a message I delivered to Kosovo’s then finance minister). We also told the government that the tender and contract terms were such that the risk of a rip off was very high, and the consequences potentially severe. The government admitted that “[t]he highway contract may not adequately protect the budget from cost overruns” (p. 38 of this IMF report) in a letter sent to the IMF right after the contract was signed, which has proved to have been a genuinely heroic understatement.

Last Saturday, when I quoted those numbers in a Twitter exchange with Kosovo’s deputy foreign minister, Petrit Selimi, he replied to me thus: “We paid it 100% in 3 years with 0cent debt. Worth every penny. A winner in opinion polls.” True (though I disagree on the worth-every-penny argument). But that is precisely the problem: a government that knows that it was being ripped off and yet pays on time, without raising objections, is either foolish or corrupt. Assuming rationality, in fact, corruption is the only plausible explanation for this behavior, given the scale of the rip off (€400 million, to be charitable). Which other country do you know that threw 10 percent of its GDP away? For Italy that would be about €142 billion; you can colonise the Moon with that. Assuming rationality, therefore, Selimi effectively told his thousands of Twitter followers that his government is corrupt.

In an email exchange between Selimi and I he wrote that “[n]ot a single legal instance has ever had any indications that there was any corruption in highway.” This, again, is true. But I take it less as a demonstration that corruption was not involved than as an indication that crime repression in Kosovo is weak. In fact, even though the Eulex prosecutors — who then had exclusive competence on grand corruption — received (from me) official documents demonstrating irrefutably that (1) the highway tender and contract were such as to make a vast rip off almost inevitable, and (2) that the government was fully aware of that risk, no investigation was opened. No serious one, at least, for had one been opened they would have asked me for the less official information I had told them I may have had from my discussions with the government about the highway. They had ample “indications” of corruption, but they didn’t use them.

So we either drop the rationality assumption or we accept that it all was the result of corruption. That includes the highway, not just its cost, for Kosovo did not need that highway at that time. I do not contest that such a highway can gradually become useful to Kosovo, over time; that it is a good highway; or that it is good to have a good highway. My point is that the (apparently still rather low) level of trade and traffic with Albania did not then, nor now, justify that expenditure, especially considering that Kosovo still has very poor infrastructure in other sectors, or in other parts of the transport sector. Most rural roads, for instance, are in “bad” or “very bad” conditions, according to the World Bank (here, pp. 40–42); and the countryside is precisely where poverty and destitution are mostly concentrated. And the country still has very poor and underfunded health, education and welfare systems.

Regarding my criticism, Selimi wrote to me that “[y]our personal vendetta has nothing to do with either Kosovo, corruption or your interest for justice. It’s just a petty personal issue.” Next to those I quoted above — we paid on time; the highway is good; our people were happy — this completes the panoply of arguments by which the cabinet member in charge of digital diplomacy, and the public relations adviser to the prime minister, defended those numbers. I cannot refute even this argument, for I was quite sorry to see his country — which then had 40 percent unemployment, 30 percent poverty, and intolerably high infant and maternal mortality rates — throw so much money away. I care less about Kosovo than he and you do, naturally, but your country hosted me for four years and gave me the opportunity to do a very interesting and enjoyable job. So I probably do have personal reasons to say — and not just think — that building that highway was manifestly and radically contrary to the public interest, even discounting corruption.

This is not what Kosovo’s public thinks, however, for Selimi is right when he says that the highway was “[a] winner in opinion polls.” One reason, presumably, is the quality of public debate about the highway and the country’s priorities, which were low. This, in turn, is probably ascribable to the fact that much of the media, especially the public television and radio broadcaster, are tightly controlled by the government. This influence is exerted either directly or through public advertisement expenditure, which keeps some newspapers afloat. Indeed, it would not have been possible to misspend 25 per cent of GDP had there been an informed public debate about this choice. Even if they did not gain a euro from it, PDK’s and the government’s propagandists such as Selimi share part of the responsibility for that waste of public money: this will not stop them from continuing to mislead the public, but you might wish to bear that in mind next time you hear them glorify the achievements of their master. Also the opposition failed to do its job on this matter. The only critical voice was Vetevendosje, but as it was not in parliament then it could not challenge the government’s choices with the (potentially) powerful instruments available to a determined parliamentary opposition.

These, in short, are the conditions that allowed the government to inflict colossal damage to the public interest without suffering political or legal consequences. Those conditions largely persist: Vetevendosje now has 16 parliamentary seats, and the skills, capacity and influence of the independent media have grown— but their numbers have not, and until very recently Vetevendosje was isolated.

So it is presumable that the same conditions led to similar results on other large infrastructure projects. In particular, Kosovo is building another — more useful, admittedly — highway, to Macedonia, which was awarded to the same consortium that ripped off the government on the Albania highway (and had previously equally ripped off Albania’s government on its own segment of that road). And now there is talk of a project to reconstruct the Kosovo A power plant. I hope that those who have an interest in investigating grand procurement corruption or wasteful infrastructure investment will carefully examine that project too, and this time they might achieve some results. The fact that the constitutional court finally lost the trust of the population shows that things can change for the better. I am optimistic; not the same level (or kind) of optimism as Selimi’s pronouncements tend to exhibit, perhaps, because obstacles remain — but I am optimistic.

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