China Eximbank provides $943.9 million preferential buyer's credit for Phase 1 of Bar-Boljare Highway Project (Linked to Project ID#42328)

On October 30, 2014, the Export-Import Bank of China signed a $943,991,500 preferential buyer's credit (PBC) agreement [(CHINA EXIMBANK PBC NO. (2014) 31 TOTAL NO. (325)] with the Ministry of Finance of Montenegro for Phase 1 of the Bar-Boljare Highway Project. The PBC carried the following terms: a maturity of 20 years, a grace period of 6 years, a fixed interest rate of 2%, a default (penalty) interest rate of 0%, a 0.25% management fee, and a 0.25% commitment fee. The Government of Montenegro issued a sovereign guarantee for the PBC and agreed to collect toll revenue to repay the lender. The proceeds of the PBC were to be used by the Ministry of Transport and Maritime Affairs of Montenegro to finance 85% of the cost (EUR 809,577,356.14) of a commercial contract [number 01-827/1] with China Road and Bridge Corporation (CRBC), which was signed on February 26, 2014. The Government of Montenegro agreed to pay for the remaining 15% of the project cost (~EUR 120 million) by collecting public revenue over a four year period. The Law on Highways enacted by Montengro’s Parliament in November 2014 allows for a full tax exemption of civil works, labor, and highway-related imports for Chinese construction companies, which increased the cost of Phase 1 of the Bar-Boljare Highway Project. According to official correspondence between the Sovereign Loan Department (Concessional Loan Department) of China Eximbank and the Ministry of Finance of Montenegro, the $943,991,500 PBC had achieved a disbursement rate of 79.6% as of December 24, 2019. China Eximbank made 38 loan disbursements (worth $751,573,422.18) between 2015 and 2019: a $94,399,148.46 disbursement on April 29, 2015, a $94,399,148.46 disbursement on June 25, 2015, a $2,101,380.73 disbursement on November 10, 2016, a $3,134,882.20 disbursement on December 16, 2016, a $5,597,537,87 disbursement on December 27, 2016, a $6,611,235.31 disbursement on March 17, 2017, a $5,935,632.15 disbursement on April 21, 2017, a $21,350,012.35 disbursement on June 20, 2017, a $18,575,856.88 disbursement on August 3, 2017, a $16,640,988.73 disbursement on August 18, 2017, a $26,694,528.23 disbursement on October 19, 2017, a $36,890,212.42 disbursement on November 22, 2017, a $32,276,840.19 disbursement on December 27, 2017, a $24,150,591.08 disbursement on December 28, 2017, a $6,400,859.77 disbursement on March 13, 2018, a $20,346,635.95 disbursement on April 4, 2018, a $13,302,831.55 disbursement on April 20, 2018, a $9,283,817.34 disbursement on May 23, 2018, a $19,678,717.95 disbursement on June 20, 2018, a $16,808,542.22 disbursement on July 24, 2018, a $17,713,805.15 disbursement on August 24, 2018, a $18,929,783.86 disbursement on September 28, 2018, a $20,466,665.09 disbursement on October 31, 2018, a $18,406,517.69 disbursement on November 23, 2018, a $25,136,684 disbursement on December 25, 2018, a $32,954,537.20 disbursement on January 8, 2019, a $12,613,486.09 disbursement on March 7, 2019, a $4,395,924.94 disbursement on March 28, 2019, a $6,738,564.68 disbursement on April 23, 2019, a $7,191,979.58 disbursement on May 24, 2019, a $7,854,729.51 disbursement on June 28, 2019, a $9,466,549.41 disbursement on August 2, 2019, a $30,327,212.99 disbursement on August 23, 2019, a $9,718,811,53 disbursement on September 25, 2019, a $8,970,658.12 disbursement on October 30, 2019, a $10,670,251.77 disbursement on November 28, 2019, and a $18,973,709.24 disbursement on December 24, 2019. By the end of calendar year 2020, the loan had achieved a 93% disbursement rate (approximately $877,912,095 out of $943,991,500). The loan's (principal) amount outstanding was approximately $751,573,422.18 as of December 31, 2019 and $877,912,09 as of December 31, 2020. The borrower made repayments worth approximately $38.67 million ($30.47 million of principal and $8.2 million of interest) in July 2021 and $38.67 million ($30.47 million of principal and $8.2 million of interest) in January 2022. The purpose of the project is to construct a 41-km long highway section from Podgorica (Smokovac) to Mateševo via Uvač, the first phase of what is planned to be a 169.2 km long highway between the Port of Bar in the south and Boljare on the Montenegrin-Serbian border in the north. The project involves the construction of 11 tunnels (measuring 18.3 kilometers in length) and 14 bridges and viaducts (measuring 6.25 kilometers in length), including the 960-meter long and 23.4-meter wide Moračica Bridge and the 5.891 km Vjeternik Tunnel. Upon completion, the highway is expected to cut the travel time the capital of Podgorica to the northern city of Kolasin to about 30 minutes and facilitate economic development alongside the transport corridor. CCCC Highway Consultants Co., Ltd. and CCCC Second Harbor Engineering Co., Ltd. are the general contractors responsible for the design of the project. China Communications Construction Co., Ltd (CCCC) and CRBC are the general contractors responsible for the implementation of the project. However, CRBC and CCCC are obliged to reserve 30% of the work on the project for domestic construction companies (to be sub-contracted by CCCC and CRBC). This project was officially launched on December 14, 2014. However, the first loan disbursement from China Eximbank (worth $94,399,148.46) did not take place until April 29, 2015 and construction did not begin until May 11, 2015. The project was originally scheduled to reach completion by May 11, 2019. However, construction of the 'priority section' was not completed until November 30, 2021. The 41-km Smokovac-Mateševo section of the Bar-Boljare motorway was officially inaugurated on July 13, 2022 and opened to traffic on July 14, 2022. It was originally envisaged that construction would take place within 4 years of the loan signing date (October 30, 2014). However, as of January 2021, the project was still not complete. It has encountered a variety of challenges and delays. Prior to project implementation, China Eximbank hired several economic professors from the University of Montenegro to conduct an Economic Internal Rate of Return (EIRR) analysis and they judged the highway to be economically viable. However, their EIRR estimate of 7.94% was later criticized on the grounds that it was inaccurate and inflated. Opponents of Prime Minister Milo Đukanović dubbed the project the ‘Road to Nowhere’, saying it typified waste and mismanagement under his rule from 2012 to 2016. In March 2021, the Deputy Prime Minister of Montenegro asked the European Union to help his government repay its debt to China Eximbank for Phase 1 of the Bar-Boljare Highway Project in order to ‘combat ... unhealthy foreign influence.’ In June 2021, the Government of Montenegro announced its intention to launch a long-awaited audit of state assets, from railways to prime seaside land, with the aim of selling some of them to help it pay down government debt. Major state assets include power firm EPCG, two major airports, the main seaport of Bar, and property coveted for tourism development, including the Great Beach, 12 km (seven miles) of sandy coast near the Albanian border. Another problem that arose was the fact that the China Eximbank loan was not hedged appropriately against foreign currency risk. The October 30, 2014 China Eximbank loan (PBC) agreement does not include a fixed U.S. Dollar/euro exchange rate, but the February 26, 2014 commercial contract between the CRBC and the Ministry of Transport and Maritime does include a fixed U.S. dollar/euro exchange rate (USD $1.3718 = EUR 1.00). As such, when the U.S. dollar appreciated against the euro, the cost of the project increased by approximately 18% for the Government of Montenegro. To address this problem, the Government of Montenegro signed a 14-year hedge agreement (with an 0.88% interest rate) in July 2021 with a syndicate of American and European banks (Societe Generale, Deutsche Bank, Merrill Lynch International and Goldman Sachs International). The purpose of the agreement was twofold: to help the Government of Montenegro hedge its foreign exchange risk on its nearly $1 billion debt owed to China Eximbank and to help the Government of Montenegro reduce the interest rate it pays on the debt. At the time that the hedging deal was signed, Finance Minister Milojko Spajic said his government would continue to negotiate ‘with European partners’ to refinance the loan for Phase 1 of the Bar-Boljare Highway Project, noting that ‘this [hedging deal] was an intermediate step towards refinancing.’ He also said that ‘we have secured ... Montenegro’s public debt from the currency risk that has been a noose around the state’s neck.’ He further noted that the deal would saved the Government of Montenegro $8 million annually, which would go directly to the government budget. Then, in mid-2021, China Eximbank reportedly agreed to defer the Government of Montenegro’s first loan repayment until late 2022. However, a February 2022 International Monetary Fund (IMF) report notes that the Government of Montenegro had already begun making repayments to China Eximbank for Phase 1 of the Bar-Boljare Highway Project. The IMF and World Bank have opposed the Bar-Boljare Highway Project because of its implications for Montenegro's sovereign debt levels. The World Bank withdrew a $50 million budget support loan in response. Moody’s also downgraded the country’s government bond rating from stable to negative, primarily due to the receipt of the $944 million China Eximbank loan for Phase 1 of the Bar-Boljare Highway Project.

Additional details

1. This project is also known as the Smokovac-Mateševo Section of Bar-Boljare Motorway Construction Project, the Smokovac-Uvač-Mateševo Section of the Bar-Boljare Highway Construction Project, and the Smokovac-Uvač-Mateševo Section of the North-South Expressway Project. 2. The Chinese project title is 巴尔-博尔亚雷高速公路斯莫科瓦茨-马泰舍沃段. 3. In the Chinese Overseas Development Finance Dataset that Boston University’s Global Development Policy Center published in December 2020, it identifies a $912 million China Eximbank loan for this project. However, AidData records the face value of the loan ($943,991,500) that is specified in the actual preferential buyer's credit (PBC) agreement {{CHINA EXIMBANK PBC NO. (2014) 31 TOTAL NO. (325)] at the time of its signature.}} 4. The PBC agreement can be accessed in its entirety via https://www.documentcloud.org/documents/20488741-mne_2014_432. 5. The PBC was financed with a $10 billion line of credit that the Chinese Government announced on April 26, 2012 to ‘support cooperative projects with for Central and Eastern Europe … in the infrastructure, technology, and green economy sectors’ (see Project ID#42328). 6. A detailed table of loan (PBC) disbursements can be accessed via https://www.dropbox.com/s/c4yyxktkj7l66sa/Table%20of%20Disbursements%20China%20Eximbank%20PBC%202014.pdf?dl=0. 7. According to the IMF, ‘the Bar-Boljare highway project significantly increased public debt prior to the pandemic (79 percent of GDP in 2019)’.

Number of official sources

36

Number of total sources

76