Concessions -- Then and Now

As a long-term profitable investment of general importance, concessions have yet to find there place in more recent Serbian
history. One of the most famous concessions to date was granted during the Federal Republic of Yugoslavia era, when the Pavlovic Bridge, linking Serbia and Republika Srpska, was built across the Drina Riverin 1992. Clearly, concessions did not exist in socialist countries, with the sole exception being the U.S.S.R, where concessions have been granted to foreign capitalists in certain areas of economy due to large-scale destruction.

The first Serbian law on concessions was brought in 1997 and it stipulated that a concession could be granted for a period of up to 30 years. The governing law in the country today is the Concessions Act, adopted in mid 2003.

For now, Serbia has granted a negligible number of concessions, of which most were given in Eastern Serbia's mining sector, namely in the Bor Mining and Smelting Basin region. Other concessions include the use of communal waste, and the still controversial deal for the construction of the Horgos-Pozega highway.

Fierce Debates

The summer of 2007 -- hot and hectic for the current cabinet which was formed at the last possible minute in April -- will be remembered by the fierce debates and exchanges between Serbian cabinet members, Vojvodina officials, and Infrastructure Minister Velimir Ilic, who kept stalling the publishing of the details of the Horgos-Pozega contract.

According to foreign investment expert Milan Kovacevic, a true economic concession must always involve a precise gain for both the concessionaire and the state, which, according to the current 2003 law, is obliged to make a concession contract public, or risk creating room for corruption and bribery.

Kovacevic claims that the late publishing of the contract, whose most important details still remain confidential, can be explained by two facts -- first, that most economic experts would be confused by the contract's non-existent economic logic, and second, that publicizing the entire contract would give rise to many doubts concerning its legality.

What Does Serbia Get?

According to tender conditions for the construction of the Horgos-Pozega highway, the concessionaire is obliged to build the
highway's left lane from Horgos to Novi Sad in three years, a total of 107 km, to maintain the 68 km highway section between Novi Sad and Belgrade, and to construct the 148km-long segment of the highway from Belgrade to Pozega. As payment for the construction work, the consortium will be entitled to collect toll charges for 25 years. The value of the job is estimated at EUR1.5 billion.

The current Concessions Act -- which, according to Kovacevic, is ill-conceived -- states that every concession through which the state allows the construction, use or exploitation of particular infrastructure or natural resources, must be made public. Although
both parties can initiate concession talks, it is the responsibility of the state to create a legally sound concession document, which will explicitly cover compliance with legal regulations and include a concession contract and additional documentation on the given undertaking.

After that, Kovacevic explains, a concessionaire would be chosen by the government, which, in the Horgos-Pozega highway case, did not happen.

"Our minister [for Infrastructure Velimir Ilic] has claimed that the Horgos-Pozega concession contract was made by some American firm, while the law says that the concessionaire cannot and must not dictate the conditions of the contract," Kovacevic said.

Kovacevic claims that the most important parts of the document, such as how toll prices will be calculated, what amount the concessionaire will pay, how the construction will unfold and how many bank guarantees are provided for the thirty-year job, dubbed by Ilic "a historic job for Serbia," are still unknown to the public.

Serbian economist Miroslav Prokopijevic agrees that "the government dealt with this contract in such a way that both the public and experts suspect that it is hiding something."

"Aside from technical standards, none of the crucial financial clauses of the contract have been published, and these include how profits will be taken over, especially after the concession period ends and the state by definition assumes concession rights," Prokopijevic said, adding that the number of bank guarantees supplied is also unknown.

The contract in question was signed at the end of March 2007 and it took nearly six months to be published.

"There are no larger concessions in Serbia, aside from the Jelen Do quarry, which practically isn't a concession, but where ore is
exploited in cooperation with a foreign buyer. Newer examples barely exist, except for concessions granted during the time of the Kingdom of Serbia [1882-1918]," Prokopijevic claims.

Warnings Disregarded

In comparison with its immediate neighbors, Republika Srpska is highly advanced in its openness toward concessions, which have encompassed not only the exploitation of ore, minerals, water resources and raw materials, but have also entered the fields of agriculture and energy production, especially the construction and use of small hydroelectric power plants.

International Monetary Fund experts have warned that Serbia is not experienced in giving concessions and that the Horgos-Pozega contract could be damaging to the state. One concession contract was broken in Hungary as soon as its government changed, while a concessionaire abandoned a job in Croatia because the traffic levels were below what the government had promised. Both contracts were annulled at the expense of the signing countries.

Economist Milan Kovacevic believes that Serbia would benefit from concessions in various fields, including forestry, due to its wealth of natural resources. He says that a good concession could be even taxing the concessioned use of the Official Gazette, which would allow the state to profit from all the regulations it publishes there.

"Giving large concessions is always a big and serious job for the state," Kovacevic said, and added that, in the last century, only the state could grant concessions.

Concessions, which by law are always awarded following a public tender, are in Serbia most often viewed through the BOT
(Build-Operate-Transfer) principle, which in the Horgos-Pozega road case means that the concessionaire will finance and construct the road, and after 30 years hand it over to the state.

According to the non-government organization Transparency Serbia, every concession contract must be made public and this is the responsibility of the executive branch of government as well, which will thereby show how it manages public resources.

The Background of the Issue

At the end of July, the government's media office chief Milivoje Mihajlovic confirmed that the Horgos-Pozega contract would be
published, "with the exclusion of confidential information, whose publishing was not approved by the concessionaires -- F.C.C.
Construction and Alpine Mayreden Bau." Infrastructure Minister Velimir Ilic sought to shift the blame to the government's Trustee for Information of Public Significance Rodoljub Sabic, claiming that the delay was a result of orders he received from Sabic -- who on several occasions publicly said that the contract should not be hidden from the public. The contract was partially published, and then the public learned that F.C.C. Construction was withdrawing from the deal and surrendering its rights to another company.

Serbia has had troubles with concessions from day one, beginning with its first recorded concession in the 19th century. The contract was brought about by chance when a French captain named Magnan asked Serbia to grant him free passage rights through the Danube and Sava rivers. He in addition received a concession for the Majdanpek mine but, after several years of terrible management, was driven from the country.

What Is Not Known

It is still undisclosed, for example, whether the concessionaire will have the right to fund the construction of the Belgrade-Pozega section with toll revenue collected on the road between Horgos and Belgrade, and what the construction deadlines are.

After a series of unsuccessful concessions, including those for the use of the first telephones in Serbia, it is believed that the first
and only serious concession was granted to Djordje Vajfert, for the use and exploration of ore in what was then the village of Bor.  With the help of French and German companies, the explorations were later developed into Europe's largest copper mine, today's Bor Mining and Smelting Basin, which awaits the government's Strategy for Privatization and Restructuring to determine its future.

Another disputed and still inactive concession involves Mt. Crni Vrh, near Bor, in eastern Serbia, whose abundant ore deposits were in 2003 the subject of negotiations with the Rio Tinto company, which at the time had the Ministry of Mining and Energy license for exploiting ores.

According to the Bor Basin management, the exploration of three mine fields on Mt. Crni Vrh could have begun even in 2003, but instead a stop was put on cooperation with Rio Tinto. A few years later a concession was given to the Canadian firm DPM Dandi Plemeniti Metali. That company planned to invest tens of millions of dollars in exploiting ore in the region over several years and opening a gold and copper mine worth some US$500,000. This contract, too, was, prevented by the government, whose parliament speaker at the time was Miroljub Labus.

Labus had claimed that the concession fee was low and inadequate in comparison to the benefits the concessionaire would derive from the deal.

The question that still no one has answered is whether things would have been different for Bor Basin's several thousand employees -- who today await restructuring and privatization -- were a concession granted in 2003 to Rio Tinto, whose sound business intentions were pointed out on several occasions to the Serbian cabinet by the highest U.K. and U.S. diplomats.

The current Serbian Concessions Act was adopted in 2003. The law stipulates that a concession is to be terminated -- with or without compensation -- if the environment or infrastructure of a region are endangered or damaged, beyond what was estimated when the contract was closed. A concession can also be revoked if the concessionaire fails to fulfill his obligations or threatens the environment for over one year.

The Act also provides the conditions and procedure for granting a concession, primarily for the use of natural resources and public goods, belonging to the state. The law also regulates the BOT concession model, which was used in the Horgos-Pozega highway contract, and lists which organizations are charged with publishing concession contracts.

A concession is the right to use a natural resource or public good, granted to a domestic or foreign concessionaire by the state under specifically prescribed conditions, which include adequate compensation.

What makes the BOT model special is that after the concessionaire uses the facility in question for the time specified by the contract and no more than 30 years, it surrenders the object to the state. The conditions for such a concession are that the object of the contract is used rationally, that it is technologically improved and functions efficiently, and that the concession is managed rationally, in keeping with ecological standards.

The law says that the object of a concession, aside from natural resources and public goods, objects and appliances, can be state- founded public firm facilities that the state is not managingrationally.