Decision on Approving Feasibility Study of Ministry of Transport and Communication - Conceding Party Print E-mail

Official Gazette 26/07, Monday, April 9, 2007

COMMISSION FOR CONCESSIONS OF BOSNIA AND HERZEGOVINA

Pursuant to Article 6, Paragraph 1, Article 13 Paragraphs 1 and 4, and Article 21 Paragraphs 1, 2 , and 3 of the Concessions Act of Bosnia and Herzegovina (“Official Gazette of BiH”, no: 31/02 and 56/04), and Article 6 of the Book of Rules on Request Submitting Procedure and Concession Awarding Procedure ("Official Gazette of BiH", no: 65/06), and in accordance with the Policy Paper on Concession Awarding ("Official Gazette of BiH", no: 82/06), the Commission for Concessions of Bosnia and Herzegovina, in the capacity of the Commission for awarding concessions of Bosnia and Herzegovina, at its fifth session held on February 8, 2007 issued the following

DECISION 
ON APPROVING A FEASIBILITY STUDY

The Conceding Party - Ministry of Communication and Transport of Bosnia and Herzegovina is hereby approved for the Feasibility Study for the Project  “Corridor 5c Highway".

Rationale

On January 11, 2007, the Ministry of Communication and Transport of Bosnia and Herzegovina submitted to the Commission for Concessions of BiH the Feasibility Study for the Project “Corridor 5c Highway” for further consideration and approval.

In consideration of the Feasibility Study from the aspect of the Policy Paper on Concession Awarding in Bosnia and Herzegovina, the Commission has established that the Project fits in with the general orientation of Bosnia and Herzegovina in terms of concession-based development and construction. 

The established legal and institutional framework, as well as the overall resources available in BiH, enable a successful realization of such Project through concession awarding. The Project fits in with the development policy of the trans-European transportation network and pan-European road corridors established at the Ministerial Conferences in Crete (1994), Helsinki (1997), and through the 2004 Memorandum of Understanding for the Development of Transportation Network in Southeast Europe, with Bosnia and Herzegovina as one of the signatories. 

The Project realisation could enable the actualisation of several socio-economic objectives set forth in the Policy Paper on Concession Awarding in Bosnia and Herzegovina, the Mid-Term Development Strategy in BiH 2004 – 2007 (PRSP), as well as in other developmental documents in BiH.  The Project initiates the employment of labour, constructional operational level and processing capacities, it enables a transfer of technologies and stimulates the adoption of international standards in numerous fields of business.

In terms of general principles of the concession awarding policy in BiH, set forth in the Policy Paper for Concession Awarding in Bosnia and Herzegovina, the Commissions has established that the Project, in the current phase, essentially satisfies the adopted principles pertinent to concession awarding. 
In the Study analysis conducted from the aspect of the gain the Project would bring to BiH, the Commission has established that the evaluation of the Project has been carried out through the "Cost-Benefit" analysis for the observed thirty-year period of time, where all of the measurable effects, from the onset of the Project realisation until the end of exploitation, have been identified, quantified, and financially evaluated:
• economic costs of highway construction in the amount of 5.609.870.000 KM;
• cost effectiveness of road network maintenance, without the network with the highway;
• effects of the vehicle operational costs, travel time costs, traffic accident costs in conditions without the highway and with the highway;
• effects of the newly created traffic;
• residual value of the project (market value of the Project after 30 years of exploitation), is calculated in the value of 80% of realisation costs.

Based on the cost-benefit analysis of the Project, the basic indictors have been calculated in terms of socio-economic effectiveness of the Project: firstly, the economic internal rate of return (EIRR), and secondly, the net-current value of the Project (NPV). The internal rate of return for the entire Project is 13,19%, which constitutes the rate of social effectiveness, i.e. the annual rate of return on funds invested. The net current value of the Project for discounted rates from 8% to 12% is positive. The afore-stated indicates that the Project yields significant gain to Bosnia and Herzegovina, which again demonstrates its socio-economic validity. 

In terms of the financial-market aspect, the study demonstrates a satisfactory level of validity and profitability for the investor as well, with average internal rate of return (FIRR) of 6,48%. Depending on the financing model, on the definition of the public sector share, and the definition of ancillary services, which have not been treated in the study, this rate could be even more favourable.

The susceptibility analysis indicates that the Project is not significantly susceptible to investment cost overrun and effects’ reduction within the range of 10%, as well as to the extension of construction deadlines for up to two years. The increase in realisation costs and cut in revenues by 20%, whereby the economic internal rate of return is 9.36%, have somewhat higher influence in terms of the profitability of the Project. Even in this case the project will be profitable and yield gain for Bosnia and Herzegovina, since the internal rate of return of funds is higher than the interest rate on loans, which could be used to finance the Project.
 
Apart from the afore-mentioned, the construction of the Corridor 5c Highway will yield effects in terms of the overall economic development in BiH, which cannot be quantified and expressed financially wise, such as:
• development of specific industries,
• opening of new work places,
• increased GDP in BiH, especially in the narrower catchment area surrounding the 5c Corridor,
• strengthening the competitiveness of the Bosnia and Herzegovina’s economy.

The Commission has also analysed the Project’s impact on the charge collected from the users, since the study anticipates for the revenues collected from toll fee to compensate for the spent construction funds, road maintenance and reconstruction costs, and management costs.

In order for the Project to provide for the required total revenue, which would cover the investment costs and enable profit throughout the 30-year exploitation, the planned charge (toll fee) amount is 0,0977 КМ/km, i.e. 9,77 КМ/100km for the 1st category of vehicles, and increased toll fees for the remaining categories of vehicles (2nd, 3rd, and 4th category). The toll fee amount of 0,0977 КМ/km is within the price range of toll fees charged in the surrounding countries, and is appropriate for the Project from the aspect of the rate of return for invested funds, as well as for the increased level of services that the Project will be offering to the users throughout the highway exploitation period.

The toll fee collection tariff system for the highway use has not been established in Bosnia and Herzegovina yet. Toll fee amount will be resolved through a certain level of liberalisation of toll fee prices, which is necessary from the aspect of protection of the Project itself from the potential risk. The amount will be set so that it corresponds the economic potential of future users, and at the same time not to jeopardise the Project and the profitability thereof.

The traffic study has analysed the impact of the toll fee amount on the volume and structure of highway traffic, i.e. on the readiness to pay the charge. It has been established that 76% of the drivers covered by the opinion poll expressed interest in using the highway, and out of that percentage, 96% are ready to pay to drive on the highway.

The gross domestic product (GDP) growth in Bosnia and Herzegovina in the following period, with an expression of will to use the future highway with payment, brings us to a conclusion that, already in the year 2012, when the completion of the first Corridor 5c highway section is planned, the interest in using the highway with payment of the charge will reach the level of 95%, which constitutes an indicator, which will additionally secure and justify the realisation of the Project.

From the aspect of the Project’s impact on provision of services to users, it is evident that the realisation of the highway project will provide for significant savings in terms of travel duration, both for passengers and for transport of goods relative to the current sections of the relevant network, which is essentially connecting to the regional M5/M17 road section on route Bosanski Samac/Bosanski Brod-Sarajevo-Mostar-Ploce (which will remain as alternative roads without toll fee being charged), as well as for redirected traffic from other routes. Highway users will enable savings in terms of exploitation costs for all types of vehicles, as well as the savings in terms of the costs related to traffic accident consequences. The use of highway will provide local companies with better access to other markets, which will significantly increase their competitiveness in terms of production and sales of their products. In this way, better conditions will be created for investments into new projects located in the catchment area of the Corridor 5c.

On the grounds of the afore-stated, the Commission for Concessions of Bosnia and Herzegovina has decided as stated in the disposition of the Decision.

The Decision is to be published in the "Official Gazette of BiH".

No: 01-1-05-3/07
February 8, 2007
Sarajevo

President of Commission
Hamed Mesanovic