Highway Robbery? $3.5 billion road project wins exemption from public oversight

The most expensive road in modern Ukrainian history will be built with no oversight.

Construction of the “Ring Road” beltway around Kyiv will be exempt from having to go through transparent procurement platform Prozorro, thanks to legislation passed this month by the ruling 244-member Servant of the People party.

This allows state road agency Ukravtodor to singlehandedly choose a company to build the highly anticipated $3.5 billion project.

“This means that everything that is connected to the beltway can be purchased arbitrarily,” wrote Prozorro CEO Vasyl Zadvornyy. “Not in Prozorro, and not constrained by any law at all.”

This should hardly come as a surprise.

Sewing up Ukraine with modern roads under the “Big Construction” program is President Volodymyr Zelensky’s most cherished project. Bending legislation to speed up the process has led to predictable results — corruption, fraud & mismanagement.

During Zelensky’s presidency, Ukraine has doubled spending on road repairs, reaching into the pocket of the COVID relief fund and spending money Ukraine has won in international courts.

Meanwhile, a tight-knit group of companies —the Turkish Onur Group, and Ukrainian Rostdorstroy, Avtomagistral-Ug and Avtostrada— have banded together to create the National Association of Road Builders of Ukraine, dividing the country into spheres of influence, allegedly colluding on state-issued tenders, and keeping prices high.

As a result, the country has lost $1 billion on road construction in two years “by conservative estimates,” according to Yuriy Nikolov, an investigative journalist and editor for Nashi Groshi, a procurement watchdog. That’s nearly 1% of the country’s GDP lost mainly to artificially overpriced asphalt.

“There are dozens of rigged tenders, with inflated prices, each costing millions of hryvnas,” says Nikolov.

Zelensky doesn’t seem to mind — as long as the roads get built and repaired.

The group of four Turkish and Ukrainian companies, known in the media as the “road repair cartel,” secured its standing under Oleksandr Kubrakov, ex-head of Ukravtodor. Under him, the state road agency successfully passed provisions that have minimized competition.

Kubrakov didn’t respond to a request to comment.

On May 18, Kubrakov was rewarded for his service and appointed infrastructure minister.

Now, with all procurement oversight lifted, Ukravtodor is about to dive into its most expensive project yet — the Kyiv beltway.

Big plan, big problems

Zelensky has said that he wants to be “remembered as the president who built good roads.”

To meet this ambition, in 2019, Zelensky’s office launched the “Big Construction” project, promising to build and repair 6,500 kilometers of roads in 2020 as well as build other infrastructure assets. By 2024, Zelensky has pledged to repair 30,000 of the nation’s 170,000 kilometers, much of which remains in poor condition.

The crowning project is the Kyiv beltway. It is set to decrease the number of transit vehicles passing through the capital, which ranks among world cities with the worst traffic and air pollution.

Apparently, Ukraine’s online public procurement platform Prozorro, a post-revolution reform achievement, stood in the way. Zelensky’s party got to work, adding amendments to get around it.

The introduction of Prozorro has been pivotal for state procurement in Ukraine. The platform is simple — all interested contenders pitch their prices, the lowest wins. The bidding is transparent. The platform estimates that Ukraine saved Hr 150 billion ($6 billion) on state procurement since introduction in 2016. Now the $3.5-billion beltway project will be commissioned without it.

The Infrastructure Ministry says their reasoning for excluding the beltway from Prozorro was that the system doesn’t allow for the so-called EPC+F contracts, meaning paying a company to do the full project from engineering to construction, for a fixed price.

“We understand the criticism, but EPC+F format in Prozorro is impossible,” says Oleksandra Azarkhina, head of the reform team at Ukravtodor.

Answering the question about the new tender regulations for the project, Azarkhina says they aren’t developed yet. Ukravtodor aims to “create an ideal tender procedure” based on international practice.

It would have to be done by August — that’s when the first part of the beltway is scheduled to be up for a tender.

In June, Ukravtodor signed a memorandum with the largest U.S. construction company Bechtel, which declared its intention to participate in the beltway project. Ukravtodor says that it’s not yet final that Bechtel will build the road.

The agency hopes that a foreign company contracted for the project will attract foreign investments and cheap loans. Ukraine lacks the funds to complete the project alone.
According to the Good Jobs First website, Bechtel tops the list of U.S. companies penalized by courts, paying nearly $1 billion in fines in 33 separate cases since 2000.

Bechtel also has a shady record in developing countries. The company abandoned the construction of a 400-kilometer motorway in Romania after completing only 54 kilometers for 1.25 billion euros.

Shady oversight

Anti-corruption activists have raised concerns about potential theft in the upcoming project. The reason: Ukravtodor is known for corruption.

The agency’s former head, Slawomir Nowak, is one notorious example. He was appointed in 2016 to give a fresh start to Ukravtodor after years of corruption and negligence.

There was no fresh start. Nowak was fired in 2019 and charged with corruption a year later.

He is accused of giving away lucrative contracts for bribes and embezzling the funds allocated by international organizations for road repairs in Ukraine.

A native of Poland, Nowak was also charged there and is currently awaiting trial.

Nowak’s case also ensnared construction firms. In April, the head of a Ukrainian road construction company Altcom was charged with bribing Nowak with some $700,000.

According to Kyiv Post sources in the National Anti-Corruption Bureau of Ukraine, Turkish company Onur is also being investigated by the agency for allegedly giving bribes to Nowak. The company hasn’t been charged yet.

Onur is benefiting from Ukravtodor’s contracts even now. Zelensky even publicly encouraged officials to hire Onur for a local construction contract in 2019, calling it “a normal company.”

The company denied wrongdoing in a statement.

“The suspicion itself doesn’t stand and contains an absolutely incorrect interpretation of the circumstances,” wrote head of Onur Ukraine Emre Karaahmetoglu.
Record spending

Bringing positive changes fast has been Zelensky’s main promise. The president’s inner circle has been eager to overlook violations to get results.

Ukravtodor’s road construction has become the epitome of this policy.

In November 2019, Kubrakov, a lawmaker from Zelensky’s Servant of the People party, was appointed to lead Ukravtodor. His main goal was to oversee the construction of a record number of roads across Ukraine.

The 2020 state budget put a record-breaking Hr 113 billion ($4.2 billion) into road construction and repairs. That’s 9% of the country’s 2020 budget spending and nearly 3% of its GDP.

In 2021, the state allocated less funds — Hr 81 billion ($3.3 billion) — on roads.

At the same time, the number of companies permitted to take part in Ukravtodor tenders was limited.

In 2020, Ukravtodor, and the Infrastructure Ministry to which the agency is subordinate, passed provisions that regulated who can be permitted to take part in state procurement tenders through the Prozorro platform.

According to the provisions, to take part in a tender, a company must have completed at least 50% of a similar project in the past three years. This means that to build a 100-kilometer road, a company must have completed a 100-kilometer road in the past.

Onur defended the rule, writing “You cannot expect an inexperienced company to build 100 kilometers of high-quality roads in a very short time, with no experience, equipment, personnel or working capital.”

Simultaneously, Ukravtodor began enlarging procurement offers, selling large portions of roads in a single bid.

“We as an association took part in drawing up these recommendations,” said Artem Hrynenko, head of the All-Ukrainian Road Construction Association. “This removed small companies that have no experience and hindered the companies with the proper experience to carry out complex and large projects.”

The companies that remained were the same ones that received lucrative offers in the past. They formed the National Association of Road Builders. Anti-corruption activists accuse them of colluding on procurement tenders to keep the prices of road construction high.

The cartel

The four companies — Onur, Rostdorstroy, Avtomagistral-Ug and Avtostrada — have won over 60% of all road repair tenders in 2020–2021.

The four companies have divided Ukraine into spheres of influence, inflating the prices of construction material and subletting each other procurement offers after allegedly colluding on procurement tenders.

“It’s a cartel,” says Nikolov from Nashi Groshi. “They create an illusion of fair competition.”

This is how the illusion works.

In February, Avtomagistral-Ug won the contract to repair a road in Dnipropetrovsk Oblast for Hr 420 million ($15.5 million). The company offered to build the road 6% cheaper than the initial price, beating its main competitor, Rostdorstroy.

In an unprecedented event, Ukravtodor published the winner’s estimated cost of construction material. The cost of asphalt was 10% higher than the average price in Dnipropetrovsk Oblast. The price of angular rock was over 50% higher than the market’s average and Avtomagistral-Ug’s price of concrete was 20% above the market.
Despite it being the cheapest offer, Ukraine lost at least $2 million on one road.

To inflate the price of a contract, according to Nikolov, the companies buy material through affiliated companies at above-market prices. These prices of materials are written down in the procurement bid to justify the high cost of the overall project.

Ukravtodor gives these companies a pass. All cartel members have been entrenched in this system, all benefit from it.

In 2019, only two companies — Onur and Avtomagistral-Ug — competed for a procurement offer in Zaporizhzhia Oblast worth Hr 643 million ($23.8 million). The companies placed a similar price, with Onur beating its competitor by Hr 120 ($4).

Shortly thereafter, Onur sublet the road project to Avtomagistral-Ug.

Onur denied participating in collusion.

“There can be no conspiracy or secret agreements. This is illegal. Therefore, we will never participate in such things,” wrote Karaahmetoglu.

Azarkhina of Ukravtodor says the problem lies in a Soviet-style system where bidders must write down the cost of each of the materials used, each block placed and so on.

“The companies are forced to write down a 1% profit rate, but I doubt that companies work for that rate,” Azarkhina told the Kyiv Post. “Overall, for purchasers it shouldn’t matter how much the bidder spent on a ton of concrete, what matters is the final price to construct a kilometer of a road.”

In December, Kubrakov said that the price of one kilometer has decreased from $920,000 in 2019 to $762,000 in 2020.

Azarkhina says Ukravtodor is set to launch a reform of tender price formation, clearing the need for bidders to write in detail prices for materials and work hours. The reform mimics tender procedures of the EBRD and the European Investment Bank and is expected to be presented to the public in late June.

Losing billions

Ukraine’s budget isn’t enough to cover Zelensky’s major road projects. In 2020, the country’s budget was $46.8 billion.

To make up for budget shortfalls, Zelensky’s government has been spending money from the COVID relief fund on overpriced asphalt.

In April 2020, Ukraine went into lockdown. The pandemic forced the government to introduce a nationwide lockdown while it desperately searched for money to tackle the pandemic.

The government of Prime Minister Denys Shmyhal amended the 2020 state budget, cut spending on regional development, social benefits and transferred the money won in international courts to create a Hr 66 billion ($2.4 billion) COVID relief fund.

According to Shmyhal, the money was to be used to buy necessary equipment for medical facilities and raise salaries for medical staffers tasked with fighting COVID. The government received the power to singlehandedly allocate COVID funds.

In the end, the Health Ministry received less than a quarter of the sum. while Hr 26.2 ($950 million) or 40% of the fund was spent on road construction.

Kubrakov defended that decision, saying that building roads will give a positive impetus to Ukraine’s economy.

“Each hryvnia spent on infrastructure will give Hr 2.5 worth of GDP increase,” said Kubrakov.

However, despite the amount of money spent on roads, there’s no evidence to assume that the roads have become better. Ukraine doesn’t have any agency that assesses the quality of roads built by Ukravtodor.

According to Nashi Groshi, in May, the severely understaffed State Audit Service found that Onur spent 15% less asphalt on a road in Poltava Oblast than was agreed in the contract. The local authorities subtracted those funds from the initial contract.

“Ukrainians usually think that yes, they steal, but at least they are building roads,” says Nikolov. “Well, we don’t even know if these roads will last.”