You're reading: Runaway Costs

When the games are over, what will Ukrainians be left with from the Euro 2012 soccer championship?

For sure, overpriced stadiums, roads and other improvements that will cost taxpayers $9 billion out of the overall estimated $20 billion project. Critics say the costs are inflated by at least several billion dollars because of no-bid contracts. Who is benefitting from these uncompetitive practices? Will Euro 2012 turn out to be a national boondoggle?

When Ukraine and Poland won the bid four years ago to co-host the Euro 2012 championships, even non-soccer fans welcomed Ukraine’s new opportunity to attract investment and overhaul its Soviet infrastructure.

Preparations accelerated after President Viktor Yanukovych took office last year. However, progress is coming at a huge cost to the state budget, transparency, competitiveness – and, some say – to Ukraine’s already battered image abroad.

Taxpayers are on the hook for $9 billion or more because private investors have largely stayed away or been kept away. Moreover, critics charge that the public money is not being well-spent. They say contracts are going to hand-picked companies at inflated prices, bypassing the competitive bidding process.

Look, if I had the three years to build Euro 2012 objects like the Kyiv stadium that the previous government had, I would’ve chosen the best companies for the jobs who would have done it quicker, better and cheaper”. “But now we don’t have much time left and the previous government left us with no other option.

– Borys Kolesnikov, deputy prime minister.

“Let’s be frank. Not holding bids makes it easy to steal money from the state budget via kickbacks,” said Ostap Semerak, a member of parliament’s budget commission and opposition lawmaker with the Bloc of Yulia Tymoshenko.

“Unfortunately, Yanukovych and [Prime Minister Mykola] Azarov are not using this as a chance to bring in investment. Their goal is to first steal money, only then prepare for Euro 2012,” Semerak said.

However, Deputy Prime Minister Borys Kolesnikov, who oversees the nation’s Euro 2012, disputed the allegations and criticism. Kolesnikov said that the previous government of ex-President Viktor Yushchenko and Tymoshenko are to blame, forcing the Yanukovych administration to move quickly to get the nation ready in time.

“Look, if I had the three years to build Euro 2012 objects like the Kyiv stadium that the previous government had, I would’ve chosen the best companies for the jobs who would have done it quicker, better and cheaper,” Kolesnikov said. “But now we don’t have much time left and the previous government left us with no other option.”

Regarding public procurement laws, Kolesnikov said that he welcomes “any legislation that will bring investors in…But look again, the previous government had majorities in parliament. They could have enacted investor-friendly public procurement laws.”

When he came to power, Kolesnikov said, the Union of European Football Associations was on the verge of eliminating Lviv as a host city because of slow progess.

“In the end, we asked parliament, what do you want? Tenders or Euro 2012,” Kolesnikov said. “Parliament chose 2012.”

Besides, Kolesnikov said, the state agency that oversees tenders for government procurement projects “is a corrupt, non-transparent government institution.”

No-bid contracts

Whoever is to blame, taxpayers are on the hook for $9 billion, according to an April 2010 government plan, and those costs are expected to rise before the matches start.

Borys Kolesnikov

A series of audits by Ukraine’s Accounting Chamber – the parliamentary body that monitors government expenditures – pinned the blame for runaway costs on managerial decisions and unsatisfactory performance by the Cabinet of Ministers and Kyiv State Administration. In one example, a 2008-2010 audit of Kharkiv’s Metalist Stadium found its reconstruction was inflated by $29 million.

One decision alone, according to critics, will cost the nation billions of dollars more than necessary.

They blame a Cabinet of Ministers resolution passed on April 12, 2010 – the first month after power changed hands from Tymoshenko to Azarov.

That fateful decision allowed state spending on Euro 2012 projects to bypass a bidding process, essentially letting organizers hand-pick companies and allow single bids.

Ostap Semerak

This is not the way that bankers and other investors hoped it would turn out, at least in the beginning.

Concorde Capital, for example, wrote in an April 23, 2007 report: “The news definitely means acceleration in investments … Property developers and construction companies will lead the pack, driven by orders to build lacking hotels, sports facilities, airport terminals and highways.”

The euphoria started to wane as political infighting between Yushchenko and Tymoshenko persisted until they left power last year. Other internal rivalries surfaced, further discouraging investors. Then the global financial meltdown sapped any remaining investor momentum.

Let’s be frank. Not holding bids makes it easy to steal money from the state budget via kickbacks. Unfortunately, Yanukovych and [Prime Minister Mykola] Azarov are not using this as a chance to bring in investment. Their goal is to first steal money, only then prepare for Euro 2012.

– Ostap Semerak, a member of parliament’s budget commission and opposition lawmaker with the Bloc of Yulia Tymoshenko

Soon it became clear that the private sector wouldn’t bring in the roughly 80 percent of the $20-$25 billion needed for the 2012 competition.

Although Ukraine is on track to meet Euro 2012 requirements – mainly road and rail transportation links, upgraded airports, ample hotel rooms and new stadiums – economists and opposition lawmakers say Ukraine’s wayward approach is a missed opportunity on all fronts.

“The entire Euro 2012 project is a debacle,” said economist Andriy Novak of the Committee of Economists of Ukraine. “It’s an investment bust. The people will have to repay the public debt in the coming years at the expense of social standards rising.”

Europe’s top soccer governing body appears to just want the jobs to get done. “The important things is that things are finished on time. We have no real view how things are actually done,” said Martin Kellen, chief operating officer of the Union of European Football Associations.

Expediency, as Kolesnikov claims, may not be the only reason for the government giving itself a free hand in awarding contracts.

One example is AK Engineering. It is a Donetsk-based company which Ukrainska Pravda, a respected online news portal, has linked to associates of Kolesnikov, which he has strenuously denied.

The firm was the sole bidder for at least $10 million to renovate the Palats Sportu indoor stadium located alongside the Olympic Stadium. Another company is Altkom, a Donetsk-based road construction conglomerate with unclear beneficiary ownership that Ukrainska Pravda has tracked as far as Belize.

It has received nearly $1 billion in Euro 2012-related infrastructure orders from the Ukrainian state.

The cost of projects keep ballooning on infrastructure overhauls mostly limited to areas where the four host cities of Lviv, Kyiv, Kharkiv and Donetsk are located.
Ukraine spent close to $1.4 billion on no-bid Euro 2012 jobs in 2010, according to parliamentarian Semerak from the Bloc of Yulia Tymoshenko.

By contrast, Semerak and others said that bids overseen by the Tymoshenko government to renovate airports and other Euro 2012 projects, for instance, were more competitive than the public spending undertaken since Yanukovych took power.

High road costs

The 2011 budget earmarked $2.5 billion for roadwork alone, more than half of which are exempted from bids. Altogether, Ukraine plans to spend $7.7 billion on Euro 2012 projects this year.

According to the Ukrainian government plan, by 2012, Ukraine plans to build or repair 3,460 kilometers of roads and highways, just 2 percent of all its 165,000 kilometers of paved roads, according to data from the CIA World Fact Book.

The extent of the road network is equal to 281 kilometers of road per square kilometer, which is three to five times below the European average.

The most often cited example is the cost of building a new 84-kilometer, four-lane highway between Krakovets and Lviv in western Ukraine. Costs for the stretch of highway have risen from Hr 1.42 billion to Hr 4 billion ($500 million), Ukraine’s Euro 2012 National Agency said on Jan. 21.

Ukraine desperately needs to overhaul its roadways, which are notoriously dangerous due to pot holes, poor planning and unclear traffic signs. Accidents (below) are common. Reconstruction is underway, but many suspect corruption is widely at play. The cash-strapped nation often spends several times more per kilometer to fix roads compared to costs in the U.S. (Courtesy)

That’s close to $6 million per kilometer of highway.

This same job would cost an estimated $315 million in the United States, where the average cost of constructing a new four-lane highway in rural and suburban areas is $1.88-$3.75 million per kilometer, according to the American Road & Transportation Builders Association.

Two local firms are doing much of the roadwork: state-owned Ukravtodor, a company with chronic financial problems that relies on state guaranteed loans, and Altcom, the Donetsk-based conglomerate.

A Donetsk-headquartered company within the Altcom group disclosed that two of its owners are Ukrainian businessmen Serhiy Pavlychev and Oleksandr Tislenko.

But Altcom and government officials have not been able to bring clarity to ownership of a Belize-owned firm operating under the Altcom brand which won a large share of Euro 2012 contracts. Altcom denies, however, having any relation to government or ministries.

“There are no civil servants or their relatives among the company’s founders. There are no high level government patrons associated with the company securing it advantageous orders,” an Altcom statement reads.

“The company has no political allies or opponents and, as such, has won bids within former Prime Minister Yulia Tymoshenko’s government and within Prime Minister Mykola Azarov’s government. Altcom isn’t afraid of open competitive bids for any job…and has always been and remains open to the press.”

Poland, by contrast, has managed to bring down the cost of building one kilometer of highway by 30 percent over the last three years, according to Poland’s General Directorate of Roads and Highways.

It accomplished this by breaking up road contracts into shorter segments, allowing a much wider range of companies to compete for bids.

As a result, Polish companies as well as European giants and firms from as far away as China have secured roadwork contracts making Poland a $10 billion construction site, a Nov. 29, 2010 Financial Times article said.

The 106-kilometer Swiecko-Nowy Tomysl highway, for example is a public private partnership in which the state and a private investor share profits in exchange for using a company’s efficient project management skills and expertise.

Put another way, Poland – with smaller territory and fewer people than Ukraine – has managed to expand its road system considerably while saving money whereas Ukraine has lagged behind on cost and reach. Moreover, Poland’s tracking of spending on Euro 2012 is light years ahead and much more transparent than Ukraine.

High stadium costs

The cost of building and reconstructing stadiums has also mushroomed. Reconstruction of Kyiv’s Olympic Stadium is approaching $550 million making it one of Europe’s most expensive stadiums.

Lviv’s stadium – originally slated for a private investor that never emerged – has more than doubled from Hr 1.1 billion to Hr 2.4 billion, said Lviv Mayor Andriy Sadovy on Feb. 21 in Kyiv.

In particular, Lviv had originally offered investors 25 hectares of land near the stadium in exchange for building the stadium and the surrounding infrastructure, Sadovy said on March 1. But no investor found it economically beneficial.

Instead, municipal authorities asked Austrian construction company Alpine Bau to do project planning for the site, which it completed in August 2008.

 

Some critics say that the uncompetitive bidding process used for Euro 2012 improvements has added needless costs to new stadiums (click to enlarge)

According to Alpine, Lviv municipal authorities paid them the $4.5 million fee for project planning and design only after a lawsuit was threatened in 2009 while the Lviv authorities were using the company’s blueprints for construction.

Lviv authorities then took bids later in August 2008 for building the stadium and related infrastructure projects. Alpine offered to build the stadium for $190.7 million but Lviv named a much modest price of $115.8 million.

Alpine withdrew its bid because “it was not willing to compromise its outstanding international reputation in stadium construction by signing a contract, knowing beforehand that it cannot be fulfilled.”

The entire Euro 2012 project is a debacle. It’s an investment bust. The people will have to repay the public debt in the coming years at the expense of social standards rising.

– Andriy Novak, economist of the Committee of Economists of Ukraine

Azovintex, a company linked to billionaire Serhiy Taruta, was awarded the job instead, agreeing to the $116 million price tag. Azovintex has since been replaced by Donetsk-based Altcom.

Sadovy, Lviv’s mayor, has regrets.

“Had the Ukrainian government understood in time the simple truth that stadiums are complicated infrastructure projects that need to be financed with state funds, had the contracts been concluded back in 2007 and not have been financed only in 2010, then I think a foreign company could’ve done this at a cheaper price,” Sadovy said. “But our people waited for some benevolent philanthropist to appear and build a stadium.”

The current cost of building the Lviv Stadium and surrounding infrastructure sites has approached $300 million, at least $100 million more than what the Austrians had offered in 2008.

Economists noted that government has eschewed public-private partnerships and is exacerbating public debt with money that could have gone into improving hospitals or schools.

“This predominant reliance on public funds isn’t good … the general economic impact will be limited because the high infrastructure expenditures are mostly limited to the four host cities,” said Ihor Burakovsky, chairman of the Institute of Economic Research and Political Consulting.

Moreover, some spending has taken place that doesn’t appear to be related to the soccer event.

Workers from Altcom take part in construction of a new airport in Donetsk on Feb. 9, ahead of the Euro 2012 football tournament which is being co-hosted by Ukraine and Poland. Four cities in each country are hosting games. Ukraine’s capital, Kyiv, is hosting the final on July 1. (AFP)

Last year, for instance, the government earmarked just over $10 million to build landing pads for helicopters in Kaniv of Cherkasy Oblast and $18.75 million to build ice rinks in cities across Ukraine through a state-owned company called Lyodova Arena.

The Kaniv helipad was justified to draw wealthy Ukrainians living abroad.

“Cherkassy Oblast has a developed historic and cultural heritage,” said Serhiy Tulub, the region’s governor on Feb. 16. “There are powerful Ukrainian diaspora in many countries. And these are not the poorest people, you know. They’ll fly to Boryspil where there’ll be a helipad terminal from which the helicopter will fly tourists to Kaniv, to [Taras] Shevchenko’s burial place.”

Yet nobody knows just how many more public procurement projects will bypass the bidding process under the Euro 2012 umbrella.

“Financial figures and plans keep changing all the time. No one is being held accountable,” said Semerak from parliament’s budget commission.

Euro 2012 spending: benches the price of a car

Probably the most revealing example of conspicuous Euro 2012 procurements was last December’s $79,000 purchase of 10 wooden benches for a Kharkiv etro
station, the equivalent of 10 Ukraine-assembled Daewoo Lanos sedans.

The controversial Kharkiv metro wooden benches (L) cost about $8,000 each. (Courtesy)

A 1+1 TV channel investigation discovered that the single bidder and supplier of the benches was a plastic sewer manhole manufacturer.

“Then why didn’t they just purchase 10 Lanoses, remove the roofs and have people sit inside the cars instead,” said Verkhovna Rada deputy Ostap Semerak sarcastically.

Despite a tidal wave of public criticism, no criminal case was opened and nobody faced prosecution after a law enforcement investigation into the legality of the bench sale found no wrongdoing.

“The Euro 2012 soccer event will take place nevertheless but we’ll be taken for fools and idiots through the whole preparation process,” Semerak said.


Poland: A world of difference across the border

On the surface, Poland and Ukraine are doing the same things to prepare to host the Euro 2012 soccer championships. They’re building new stadiums and roads, and updating other infrastructure such as airports.

But Poland is undertaking the projects in a vastly more competitive and transparent manner than Ukraine, a difference that should help Ukraine’s neighbor minimize corruption and maximize the effectiveness of the spending.

This predominant reliance on public funds isn’t good … the general economic impact will be limited because the high infrastructure expenditures are mostly limited to the four host cities.

– Ihor Burakovsky, chairman of the Institute of Economic Research and Political Consulting.

Poland is undertaking 216 infrastructure projects, 81 of which are directly related to Euro 2012. Poland’s estimated costs are $30.4 billion, 40 percent of which are covered by the European Union, according to Poland’s Euro 2012 National Agency.

Poland’s Euro 2012 agency has devised a “Master Plan” that is updated quarterly. The website provides a detailed timetable of what needs to be done, the stage of project completion and important information about the competitive bidding process. All entries are color-coded and easy to follow.

Ukraine doesn’t have anything like this.

Poland also puts a premium on accepting the lowest bid, rather than a company’s country of origin, as Ukraine is doing. Consequently, Poland has attracted European construction giants and other firms as far away as China, along with Polish companies, to compete for Euro 2012 orders.

As a result, according to Poland’s General Directorate of Roads and Highways, the cost of building one kilometer of highway in Poland has dropped by 30 percent over the last three years and compares favorably with Ukraine’s per-kilometer costs.

And Poland’s Euro 2012 agency and General Directorate of Roads and Highways are accessible and quick to respond to requests for information, unlike the people overseeing Ukraine’s preparations for Euro 2012.

Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].