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CROATIA: Croatia pulls out of a highway construction deal with Bechtel

by Zeljka Vujcic
August 13th, 2004

ZAGREB, Croatia - Following pressure from the opposition and the media and a warning from the European Commission, the Croatian government had to back out of a deal with the powerful U.S. company Bechtel. It announced on 4 August that a public tender would be held for the construction of a 37-kilometer-long section of a future highway in southern Croatia that had previously been contracted to Bechtel.

For two weeks, Prime Minister Ivo Sanader and his ministers had persistently been trying to persuade voters that their hands were tied by the previous government's deals with Bechtel, but to no avail. The public showed little understanding for the government's arguments, reacting instead like a bull to a red rag to any hint of fraudulent deals involving the ruling Croatian Democratic Union (HDZ), a party that was synonymous with widespread corruption in the 1990s.

The popularity of the HDZ has slumped in polls despite its undeniable successes in foreign policy, notably achieving the country's EU-candidate status in April. A survey by the Puls agency found that support for the party had fallen from 32 percent in April to 27 in July, although it remains the most popular of Croatia's political parties.

Only a few months after facing fallout from a major privatization scandal involving a tourist company on the island of Hvar, the government was forced to backtrack again. But the Bechtel case has even more powerful reverberations since it involves the project of building a highway network across Croatia. The project was given top priority by the previous coalition government.

THE BIG CROATIAN HIGHWAY PROJECT
Since 2000, Croatia has accelerated road construction, pouring some 2.6 billion euros into the sector.

Under the previous government, construction began on a major 300-kilometer-long highway between Zagreb in the north and Split in the south, while the biggest portion of the highway connecting the capital with the port of Rijeka was finished.

The new government said the project of intense road construction would continue over the next four years, although not to the extent initially planned. The total sum allocated for the road program has been slashed by 1 billion euros, or about 40 percent.

Nevertheless, new ambitious plans like a Split-Dubrovnik highway and a bridge to the southern peninsula of Peljesac were also announced.

Sanader's conservative government started off badly, as some sections of the Zagreb-Split highway that were to be opened to traffic at the start of the tourist season were not finished in time.

Already ridiculed for unforeseen delays on the highway, Tourism and Transport Minister Bozidar Kalmeta on 17 July said Bechtel would take over construction of the 1.2 billion kunas (163 million euros) section of the future Split-Dubrovnik highway.

Kalmeta said the decision was based on an amendment to a contract with Bechtel signed by the previous government stating that the company had a right to a compensatory section if the government bailed out on a previously agreed-upon job. Since a section linking the capital of Zagreb with the town of Sisak--the segment initially contracted with Bechtel--was still in the feasibility-study phase, the government argued it had to offer Bechtel the Dugopolje-Sestanovac section of the Split-Dubrovnik highway.

The opposition promptly refuted those claims, accusing the government of corruption and announcing that it would form a parliamentary commission to investigate the case. "Avoiding a public tender is an eldorado opening space for corruption," former prime minister Ivica Racan said at a press conference a day after the announcement.

Racan and the construction minister in his cabinet, Radimir Cacic, denied that the decision was a result of amendments to the contract with Bechtel that they agreed on in December 2003. They stressed that their government had "managed with great difficulties to erase from the deal, concluded by the previous HDZ government with Bechtel in 1998, an obligation that the firm must be compensated for the construction of the Zagreb-Sisak highway."

They presented the journalists with copies of the contract stressing that in its amendments the word "must" was replaced with "can," leaving to any future government the choice whether to assign an alternative section to Bechtel.

Claiming that Bechtel was 15 percent to 45 percent more expensive than the prices offered in public tenders, Cacic said that the job should be given to Croatian firms.

The late president Franjo Tudjman, the HDZ founder, hoped the contract with Bechtel would help improve his international standing when the former Yugoslav republic found itself on the brink of international isolation shortly after the 1990s war of independence. The 1998 deal on building three sections of the highway from the Slovenian border via Bosnia to Dubrovnik, including the Zagreb-Sisak section, was less than a bargain for Croatia: the prices agreed were 30 percent above the average at the time, experts argued.

Racan and Cacic argued that Bechtel agreed with the changes to the contract made in December, a month after the general polls in which the center-left coalition was defeated by the HDZ, because it counted on the new government to be more sympathetic.

INSIDER DEALS
Racan and his former construction minister accused Foreign Minister Miomir Zuzul of setting up deals for Bechtel, reminding the public that Zuzul had been a lobbyist for Bechtel.

Although at first denying such allegations, Zuzul, Croatia's former ambassador in Washington, soon admitted he had worked as a consultant for Bechtel, only to terminate all business after he was named foreign minister.

This gave rise to suspicions that through the direct deal with Bechtel--a firm that has been awarded numerous contracts in Iraq--Croatia was hoping to make amends to the U.S. administration. Despite generally vocal support to U.S. policy, Croatia refused to send soldiers to Iraq and to sign an agreement not to hand over U.S. citizens to the International Criminal Court.

But in an interview with the weekly newspaper Globus, Zuzul firmly rejected speculation about political pressure on the government.

"Bechtel is a big and influential company, one of the first to have entered Croatia in 1996. At that time, the political dimension was important, of course. But today this deal has a primarily commercial importance. In deciding on a continuation of the deal with Bechtel, business rather than political motives were decisive."

Sanader replied to his opponents that the government was merely fulfilling what his predecessors had agreed to and accused Cacic of corruption during his tenure.

"My government will put an end to all irregularities in highway construction, of which there are plenty since Cacic had been giving jobs to his own firm, which he registered under the name of his wife," the HINA news agency quoted Sanader as saying on 20 July.

According to media reports, several firms in which Cacic has ownership interests, including the construction firm Coning, obtained state jobs worth 250 million kunas (35 million euros) during his tenure.

Transport Minister Kalmeta has threatened Cacic with a government audit report that is to be presented to parliament in the fall. The report accuses Cacic of suspicious deals in his ministry.

Cacic has been defending himself from accusations of a conflict of interest, stating that he had transferred ownership of his firms to a barrister's office and since then had no control over their management.

Domestic squabbling had barely started when the European Commission decided to step in. Commission spokesman Jean-Christophe Filori told the daily Jutarnji List on 20 July that the commission was gathering information on the case in order to establish whether the direct deal was concluded according to Croatia's public-procurement law.

Speaking at a government session two days later, Sanader said that the final decision on signing a direct deal with Bechtel will depend on the EU opinion.

Although claiming that their hands were tied by previous deals, Sanader at last announced that the government would invite tenders "in order to refute all suspicions of petty politics."

Far from announcing a lawsuit, as some ministers had been warning, Bechtel said it regretted the development and announced it was pulling out of Croatia and sacking almost all of its 1,000 Croatian employees.

A NEW TRANSPARENCY
Croatians, becoming increasingly skeptic about the benefits of joining the EU, witnessed what the introduction of EU standards can do in weeding out domestic corruption.

"As a candidate country we have to implement the Stabilization and Association Agreement even more strictly, and Brussels is becoming an active participant in domestic policy," Damir Grubisa, professor at the Faculty of Political Sciences in Zagreb, said. "The problem is that up until now the EU has been seen as something outside of Croatia, while now western European policy is becoming part of domestic policy, something the public is still not aware of."

Croatia still figures high on the lists of the most corrupt nations in surveys by prominent economic institutes, faring only slightly better than other Balkan countries.

Another EU aspirant, Romania, has gone ahead with a contentious project of building some 400 kilometers of highway through a direct deal with Bechtel, despite opposition from Brussels.

According to Grubisa, Sanader and his ministry for European integration will have to watch over their team in order to avoid future scandals like Bechtel.

"Our ministers do not possess sufficient knowledge about issues of European policy, and they are still not aware that since the day we became a candidate country, we have to play according to the rules applied within the EU," Grubisa said.

Zeljka Vujcic is TOL's correspondent in Zagreb.

Copyright 2004 Transitions Online.
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