Serbia Pays Price of Delays, Errors and Costly Cars in Rail Upgrade

A BIRN investigation has identified serious delays on all three sections of the line, as well as mistakes that have cost Serbia almost $35 million in penalties; it also turned up documents showing that almost $720,000 of an $800 million Russian loan for the railway line was spent on the lease of six cars from a Russian contractor.

Years behind schedule

Plans to modernise the 350-kilometre track between the capitals of Hungary and Serbia date to 2013, when the two countries and China signed a memorandum of understanding.

Chinese loans cover 85 per cent of the cost – two billion euros and counting – while Serbia also received a credit line from Russia to help with its stretch of the track.

But instead of finishing the upgrade in mid-2018, as Vucic promised, it was only that year that work officially commenced on the first section between Belgrade and Stara Pazova.

For a second section, between Stara Pazova and the northern Serbian city of Novi Sad, a construction permit was issued on January 31, 2019, more than a year later than first envisaged.

Work is yet to start on the third section from Novi Sad to the border with Hungary and, according to BIRN’s findings, the procedure for issuing a construction permit is still ongoing.

Penalties paid to Russia

Signing of the contract between “Serbian Railway Infrastructure” and “RZD International” for new railway projects, worth 230 million euros. Photo: Ministry of Construction, Transport and Infrastructure

Besides the delays, Serbia has also paid a heavy price for a number of design mistakes and a failure to draw on the Russian loan on time.

According to BIRN’s findings, Serbia paid compensation of some $30 million to its Russian partner due to mistakes made by the Serbian Institute of Transportation, CIP, during the design of a viaduct and tunnel in the village of Cortanovci, southeast of Novi Sad.

The state also paid a fine of more than $4.7 million after it delayed drawing on a Russian loan tranche for the construction of the Stara Pazova-Novi Sad section.

The loan agreement was signed in January 2013, valid for five years. But since construction did not start within that period, Serbia did not draw on the loan, resulting in a penalty paid to Russia in March 2018.

A 2016 protocol amended the loan agreement, which now expires at the end of this year, which is also the deadline set by the government for completion of the Stara Pazova-Novi Sad section. It is unclear whether this deadline will be met. 

Serbian Railways Infrastructure told BIRN it had no knowledge of any penalties being paid. Nor did the Ministry of Construction, Transport and Infrastructure confirm or deny paying any penalties.

But Zorana Mihajlovic, who was in charge of the ministry between 2014 and 2020, confirmed BIRN’s findings.  

“Unfortunately, after taking over the Ministry of Construction, Transport and Infrastructure, we realised that no specific projects were agreed as per that loan, but that the loan amount for the railway was agreed in principle,” said Mihajlovic, now Serbia’s minister for mining and energy. 

Another reason for not drawing on the loan in time, she said, was the fact that work undertaken by CIP did not correspond to the actual situation on the ground.

“The penalties you are talking about derive from Article 2 of the Agreement between the Government of the Republic of Serbia and the Government of the Russian Federation on the approval of the state export loan to the Government of the Republic of Serbia, which refers to all undrawn funds within five years, being the loan amount originally agreed,” Mihajlovic said in a written response.

Russian concerns over expropriation, permit

Serbian President Aleksandar Vucic gives a speech during a joint tour of the works on the construction of the viaduct on the section Stara Pazova-Novi Sad with the Ambassador of Russia Aleksandar Bolcan-Kharchenko. Photo: Presidency of Serbia / Dimitrije Gol

The Agreement was signed in Moscow on January 11, 2013 by then Serbian Finance Minister Mladjan Dinkic. Russia agreed to lend Serbia $800 million, valid for five years. In late 2016, Mihajlovic signed an amendment extending the loan until end-2021, but Serbia was obliged to pay commission by March 15, 2018 on any part of the loan unused by end-2017, hence the penalty of $4.7 million.

Serbia will have to pay again by March 15, 2022 on any amount still unused at the end of this year.

Mihajlovic blamed a lack of “ready-made projects” on which to spend the Russian money.

“The Ministry of Construction accelerated activities on the realisation of the Russian Loan, which resulted in the completion of projects within the agreed deadlines,” she said. “After that, there were no more payments of such penalties.”

Yet even after the loan period was extended, the Russians had concerns.

“In our opinion, the most problematic issues may be those related to expropriation and timely obtaining of a construction permit,” Sergey Pavlov, First Deputy Managing Director in charge of international business development and international affairs at Russian Railways, RZD, the contractor on the Stara Pazova-Novi Sad section, wrote in a letter to Mihajlovic a month after the loan was extended.

According to the letter, the permit should have been issued by August 29, 2017, but BIRN found it was actually issued on January 31, 2019.

With regards to the expropriation of land, the director of Serbian Railways Infrastructure, Miroljub Jevtic, was arrested in January 2020 on suspicion of involvement in embezzlement during the process. He was convicted and sentenced in early October to one year in prison.

Jevtic declined to comment, citing ongoing legal proceedings.

Costly cars

Viaduct between Beska and Cortanovaci on the section of the fast railway between Stara Pazova and Novi Sad. Photo: Presidency of Serbia / Dimitrije Goll

According to a railway source, under the agreement between Serbian Railways Infrastructure, as the investor, and RZD as the contractor and designer, the cost of any project errors are borne by the investor.

Hence how Serbian Railways Infrastructure came to pay $30 million for mistakes made by the Serbian Institute of Transportation in designing a viaduct and tunnel at Cortanovci, the source said.

Neither Serbian Railways Infrastructure nor the ministry would confirm the specific case, saying only that the project had incurred extraordinary costs.

“All interim payment certificates that have been paid so far are in accordance with the Agreement that exists with the contractor, the Russian company RZD International, and the planned funds within that Annex to the Agreement,” the ministry and Serbian Railways Infrastructure said in identical responses to BIRN’s questions.

Part of the Russian loan was not actually spent on upgrading the railway line but on cars, office supplies, coffee cups, cutlery, water heaters, sinks and computers, according to documents obtained by BIRN. Spending on such items totalled a little over $794,000.

Curiously, $720,000 of this sum was spent on the lease of six cars from RZD – five Dacia Dusters and a Skoda Yeti. The market price of a Dacia at that time was roughly $13,800.

In a letter dated June 9, 2016, the then director of Serbian Railways Infrastructure, Dusan Garibovic, wrote to RZD’s director in Serbia, Mansurbek Sultanov, agreeing with the price.

“We refer to your Offer for material for supervisory authorities submitted by email on June 8, 2016 and we inform you that we agree with the prices and at the same time we ask you at the same time to envisage the possibility of refunding part of the funds for the use of the cars in case the cars are used for a period of less than five years,” Garibovic wrote.