Highway to debt: Re-balkanization of Montenegro’s fate

The signature project of the DPS government, “Bar-Boljare” highway connecting Port of Bar with Montenegro-Serbian border has always been regarded as a “too big bite” but also “once in the lifetime” opportunity for Montenegro, especially after the government started losing hope to ever find a creditor on the Western market. In 2014, despite the opposition from the IMF, Montenegro signed an USD denominated loan deal with Chinese Exim Bank to finance the first stretch of the highway. Exim Bank provided a loan for 85% of total value with 2% interest rate, 6-year of grace period and 20 years for repayment. By the end of 2014, Exim Bank approved 697 million EUR loan, 85% of the first offer given by China Road and Bridge Corporation (809 million EUR), the main contractor on the highway.

From 2015 to 2019, China Road and Bridge Corporation (CRBC) was engaged in the first and the most complex, 41 km long, Smokovac-Matesevo section. Due to complex terrain features, accessibility issues and frequent renegotiations on contract addendums this section was relatively soon expected to exceed the initial value (809 million EUR). Yet, the government never finished ‘due diligence’ in order publish adjusted value of total expenditures, as such it was frequently subject of various unconfirmed and mostly politically motivated interpretations, with estimates ranging from 890 million to over 1 billion EUR.

The section was firstly expected to be finished by 2019 (within agreed period of 4 years), but just about that time problems started to emerge. Due to not very foresighted prep work resulting in geological and hydrological studies commissioned after the start of construction, delays in “prioritization” of certain sub-sections and some important construction works not included in the contract the government was forced to extend the deadline to Sept 2020 and renegotiate separate annex to contract. Non-transparent business that sticks to a most of Chinese investments in the region was also, not entirely to a Chinese fault, raised in this project. Negotiations from the very beginning were carried out without due public scrutiny. More transparency in conducting project supervision was the point raised by IMF, while several media outlets (Dan, Vijesti) continuously raised issue of non-transparent increase of expenditures and deadline alterations. Environmental concerns (Tara river pollution) at this stage became salient in reports of Montenegro`s NGO organizations.

COVID-19 lockdown made further delays in construction plans and the Chinese contractor claimed vis major in seeking to extend the deadline for another year. Penalties were rumored to be put on table, especially because certain subsections (connecting roads not previously included in the project) have altered and the total net expenditure has been criticized to be disproportionate with expected expenditure rate. There were scant promises from the Ministry of Transportation, the main body in charge for the project implementation, to tackle both issues with CRBC, but negotiations dragged to the Aug 2020 post-election period and communication with CRBC virtually halted pending a new cabinet formation. As a result of the reshuffle that followed, Transportation ministry was dissolved and a new umbrella-scoped Capital Investments Ministry came in charge of resuming the negotiations.

The 2020 government change open the way for fresh alignments and brought to surface these fallouts between the project negotiations, and between the government and “the Chinese” (as creditor and contractor), which DPS government have tried to keep underwater. But, before anything decisive could have happened in negotiations, grace period on the loan expired in 2021 and Montenegro was obliged to start with the debt repayment program. In the instance, the project and the ongoing negotiations with the Chinese were caught in crossfire between DPS- sponsored and the new government mouthpieces. Both the highway project and negotiations with Chinese contractors were prominent issues in the media; on the one side, to reveal ineptitude of the current government in tackling the most important state matters, on the other, to fan anti- corruption zeal and ancien regime revisionism proved the surest way to discredit DPS politicians. Either way, Montenegrin public was brought up to discussions supposedly due before the project had started.

The project has been criticized by the public, media and international financial partners as significantly over-stretching Montenegro’s debt to GDP ratio, threatens fiscal stability and risks default on (reprogramming) credit repayment in the long-term. A tone not much different from what IMF and the WB had warned in 2015 and couple of times thereafter, but now instead of “reddish” debt level of 60-70% of GDP, some pessimistic figures show a debt rate soon exceeding 100%. After taking the office, ‘the twelve apostles’, as the new cabinet is being nicknamed, released EUR denominated bonds to “patch up” budget shortages, grimly announcing to spend the next 200 days only running financial damage control. Commitments on keeping fiscal stability were given to the Western partners, but the strategy on debt management was not on sight.

Many actors went back to a bigger picture and objected “political” decision to carry out the project as the impartial and comprehensive study on the costs and benefits was never done. Important point was the squandering ‘tiger’ opportunity or maintaining the developmental leap Montenegro had sustained relative to the region since independence. Indeed, prioritizing the construction of highway along the Adriatic-Ionian corridor (part of E65, connecting Montenegro with Albania in the south, and Bosnia and Herzegovina and Croatia in the northwest) would probably be a more urgent project for infrastructural development with more immediate windfalls for national and local tourist-oriented economy. The Peljesac bridge construction project in Croatia, also done by CRBC on E65 is cited as a successful example of a project that follows national development plans. On the other hand, having a stretch of a highway that will for a while have a dead end in depopulating Montenegro’s North region (adjoining highway on the Serbian side is still in the planning stage) is hardly economically justified; moreover, geo- politically, having an ‘once in the lifetime’ project spent on building transportation dependency on Serbia makes Montenegro’s developmental orientation fait accompli. This wouldn’t be much controversial, if the DPS regime haven’t become adamant in the late stage to ‘decouple’ Montenegro from political, social and cultural attachments with Belgrade. Ironically, the construction of highway towards Serbia have already slowly progressed, while political relations with Belgrade rapidly deteriorated. That the DPS government symbolically orphaned its signature project, at least as the backbone of national development, was evident in failure to coordinate or communicate with Belgrade the construction of the section on the Serbian side. The new government, on the other hand, wouldn’t mind building infrastructure links with Serbia, but staggering debt issue is prevailing. Mind that the cheaper Peljesac bridge project would be still be called a “cathedral in desert” in Croatian media if it had to be build from local taxpayer’s money. Without the support from the EU at the first place, Montenegro started hoping Brussels could be persuaded into assisting with the debt reprograming and even buying out financial obligations from the Exim bank.

Government’s desperation became obvious after a new element was injected into this already heated situation in the form of the famous (deputy PM) “Abazovic testimony” before the EP Committee in March 2021. Early reports on this testimony, which purported Abazovic’s open warnings on the Chinese ‘malicious influence’ in the region have been diluted or rebuffed in subsequent government releases. The recriminations about authenticity of his statements in Brussels were, as usual, inconclusive, but it managed temporary to swing public scrutiny away from the government’s true intention. Raising (political) fears on becoming debt-dependent on Beijing was, as it seems, nothing less than appeal for European financial tutorship and evading direct responsibility for austerity measures that are likely to occur in the near future. Some Western media outlets used fallouts of his statement to play ‘debt-trap’ card against Beijing. German HAZ, according to Vijesti, found a similar example in Sri Lankan port of Hambantota, which due to financial problems of Sri Lankan government was handed over to China under 99-year lease in 2017. A much biased account oblivious of the whole picture of China-Sri Lanka cooperation and PR damage this particular lease caused to Beijing now claimed: “A spectre haunts Montenegro, the spectre of Hambantota”. Subsequent concerns saw Port of Bar as a next Hambantota, even Montenegro’s “beautiful coastal destinations” fall a victim to debt and “become Chinese”.

However, on the official level, the response was not as hoped it would be. EU Commission in several statements published after “Abazovic testimony” played down the idea of buying off and taking the credit repayment program, through EUR denominated interest rates by some EU funds or European banks. Chinese side was also alarmed with all signs of faltering financial commitments of its debtor, more it was concerned with long-term solvency of Podgorica if the EU refuses to mediate. At least this is how their patient silence pending the EU reply was interpreted among some experts. Sudden downfall of government-issued bond value in mid-April, some argue, was a consequence of shrinking confidence in Montenegro on the both sides.

By the end of April, debt controversy has not yet downsized, but debt reprograming alternatives are not found, and could be exhausted soon unless the government returns to the original creditor and tries to bargain either lower return rates or grace period extension. The whole episode with politicization of debt obligation seems as a coping mechanism in accepting its new fate. The current government would have rather hoped it had happened during the DPS mandate, instead presiding over the grand decline period looming over Montenegro.