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

Project narrative

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 $94,399,148.46 as of April 29, 2015, $188,798,296.92 as of June 25, 2015, $190,899,677.65 as of November 10, 2016, $194,034,559.85 as of December 16, 2016, $199,632,097.72 as of December 27, 2016, $206,243,333.03 as of March 17, 2017, $212,178,965.18 as of April 21, 2017, $233,528,977.53 as of June 20, 2017, $252,104,834.41 as of August 3, 2017, $268,745,823.14 as of August 18, 2017, $285,209,974.63 as of September 22, 2017, $311,904,502.86 as of October 19, 2017, $348,794,715.28 as of November 22, 2017, $381,071.555.47 as of December 27, 2017, $405,222,146.55 as of December 28, 2017, $411,623,006.32 as of March 18, 2018, $431,969,642.27 as of April 4, 2018, $445,272,473.82 as of April 20, 2018, $454,556,291.16 as of May 23, 2018, $474,235,009.11 as of June 20, 2018, $491,043,551.33 as of July 24, 2018, $508,757,356.48 as of August 24, 2018, $527,687,140.34 as of September 28, 2018, $548,153,805.43 as of October 31, 2018, $566,560,323.12 as of November 23, 2018, $591,697,007.12 as of December 25, 2018, $624,651,544.32 as of January 8, 2019, $637,265,030.41 as of March 7, 2019, $641,660,955.35 as of March 28, 2019, $648,399,520.03 as of April 23, 2019, $655,591,499.61 as of May 24, 2019, $663,446,229.12 as of June 28, 2019, $672,912,778.53 as of August 2, 2019, $703,239,991.52 as of August 23, 2019, $712,958,803.05 as of September 25, 2019, $721,929,461.17 as of October 30, 2019, $732,599,712.94 as of November 28, 2019, $751,573,422.18 as of December 24, 2019, $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, $38.67 million ($30.47 million of principal and $8.2 million of interest) in January 2022, $38.67 million ($30.47 million of principal and $8.2 million of interest) in July 2022, $38.67 million ($30.47 million of principal and $8.2 million of interest) in January 2023, $38.67 million ($30.47 million of principal and $8.2 million of interest) in July 2023, and $38.67 million ($30.47 million of principal and $8.2 million of interest) in January 2024. The purpose of the project was to construct a 41-km long highway section from Podgorica (Smokovac) to Mateševo via Uvač, the first phase of what was 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 involved 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 was 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. were the general contractors responsible for the design of the project. China Communications Construction Co., Ltd (CCCC) and CRBC were the general contractors responsible for the implementation of the project. However, CRBC and CCCC were 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 hedging 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 nearly $1 billion of debt owed to China Eximbank and to reduce its interest payments to China Eximbank. At the time that the hedging agreement was signed, Montenegrin 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. Then, in June 2023, Montenegro's Ministry of Finance announced that it had activated an 'opt-out clause' in its hedging agreement (which converted its dollar debt to China Eximbank into euros) with Societe Generale, Deutsche Bank, Merrill Lynch International and Goldman Sachs International due to unfavorable eurozone market forecasts. However, Milojko Spajic (who was serving as Montenegro's Minister of Finance when the hedging agreement was finalized) said during a June 16, 2023 appearance on Radio and Television of Montenegro that '[t]he real reason for this government's exit from [the] hedging [deal] is that there is no money in the treasury.' He claimed that Government of Montenegro opted out of the hedging agreement because its coffers were running low and it needed the $64 million that it earned from exiting the agreement to meet an upcoming debt payment to China Eximbank. Then, on January 17, 2014, Montenegro's Ministry of Finance announced that it had signed another (second) hedging agreement as a cross-currency swap with four European and U.S. banks. The agreement reportedly covers the conversion of $754.07 million oustanding debt under the China Eximbank loan at an average euro/dollar exchange rate of 1.087. The hedging agreement was reportedly valid until the loan reached maturity in 2035, with an option to revise the terms of the agreement in two years. The hedging agreement helped cut the interest rate on the loan from 2% to 0.98% and reduce the cost of the sixth repayment instalment to China Eximbank by EUR 3.6 million ($3.9 million), according to Montenegro's Ministry of Finance. When China Eximbank financing for the Bar-Boljare Highway Project was first announced, the IMF and World Bank opposed it because of the 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.