BUDAPEST MUNICIPALITY AND THE NATIONAL DEVELOPMENT AGENCY (NFÜ) CONCLUDE A NEW CONTRACT TO FOSTER TRANSPARENCY IN THE FINANCING OF METRO LINE 4

Budapest Municipality and the National Development Agency signed a new, unified contract on the financing of the M4 Project on 21 December 2012. In order to maximize eligibility for European Union funding, the Grant and the Financing Contracts were amended under unified principles. Set principles are to be applied in the accounting of additional works and variations and the management of claims. Signed by Mayor István Tarlós and National Development Agency President Zoltán Petykó, the new contract renders the measure of state and municipality involvement transparent, and the new framework budget of the project calculates with, aside from all the remaining works, the total amount of the greatest financial risk foreseeable. The total cost of the investment is HUF 452 billion. The decision of the Municipal Assembly on 21 December also enables the replacement of the Engineer organization of the metro project; BKK Közút (Public Road) Zrt. under the aegis of Budapest Transport Centre (BKK) will fulfil all the organizing engineer tasks of the M4 project as of 2013.

At the formal signing ceremony, István Tarlós called the Metro Line 4 project emblematic. He said the event was only seemingly the act of signing a contract; it was indeed a decisive step forward in the biggest current Hungarian construction project. The Mayor explained that, in order to find a satisfactory settlement for the current financial risks, a new, unified metro contract with the Hungarian state was needed, which would include the European Union and government budget funds in a single system, ensuring also that possible additional costs would not burden the Municipality alone.

István Tarlós emphasized that, as a result of the constructive cooperation with the Cabinet, the conditions of closing the project successfully have been established, thanks to which we will be able to “delight together in one of the most modern metros of Europe”. The mayor called attention to the fact that it is no overstatement to say that what happens with this project will influence almost all Hungarian projects financed through European funding.

Zoltán Petykó, the President of the National Development Agency, reported that, as a result of the efforts made recently, the project will now be realized irreversibly under strict accounting. He stated that, with the conclusion of this contract, the project has come to a major milestone, which will make the project be more transparent and simpler and its implementation faster. The National Development Agency seeks to ensure that all the contracts of the project meet European Union norms, and that thus a greater proportion of the project will be eligible for EU funding, thereby relieving both the Hungarian national and the Budapest municipal budgets, as NFÜ President stated.

The Assembly’s Decision

At its 21 December 2012 extraordinary session, the Municipal Assembly decided that the amendment proposal, following its approval by the Cabinet (NFÜ), the requirements concerning the organizer engineer (the “independent engineer” in the Transport Operational Programme (KÖZOP) terminology, the “FIDIC Engineer” in the contractual terminology of the project) would change in the Guide to Eligible Costs appended to the contract. Under the previous Guide, the “Engineer”, either FIDIC or its equivalent, meant an engineer independent of both the beneficiary and the employer; according to the amendment proposal, the “Engineer” is either FIDIC or its equivalent, i.e., the requirement of the Engineer’s being independent of the beneficiary and the employer is now eliminated. As result of the decision, BKK Közút Zrt., a subsidiary of the Budapest Transport Centre (BKK), can fulfil the tasks of the engineer organizing the construction of Metro Line 4 following the amendment of the applicable section of the contract by the Municipal Assembly.

The Financial Funding System Ensures Handover of Metro Line 4 in 2014

The complexities and structure of the contractual system of the M4 Project have resulted in contractors’ claims burdening the project by billions of forints. The city leadership is determined to ensure that the 2014 final deadline is kept in the project whose technical completion has reached 77%. Accordingly, it has conducted successful negotiations with Alstom, the manufacturer and supplier of the vehicles, as well as the provider of integrated systems and power supply, Siemens.

For a satisfactory settlement of the current financial risks of the project, the conclusion of a new, unified metro contract with the Hungarian state became indispensable, which would include both the EU and the government budget resources in a clear-cut system, and ensure that possible additional costs would not burden the Budapest Municipality alone. The objective of the new contract is to unify the financial resource system behind the project, render claims manageable, and ensure that the new metro line can indeed be handed over in 2014.

It was as a result of the constructive cooperation between the Mayor and the Cabinet that Government Resolution 1448/2012. (X.11.) was adopted, which is a fundamental condition of successfully closing the project, as it defines the measure of state financing required for completion and the technical content to be realized and the Municipality’s own financial obligations.

The new contract renders more transparent the drawing of resources from the Cohesion Fund of the European Union and domestic budgetary allocation in the Operative Programme (KÖZOP); it also includes the European Union Grant Contract, the Financing Contract between the Hungarian State and the Budapest Municipality, as well as the Supplementary Agreement of the latter in a unified framework.

The most important objective of concluding the new, unified contract was to ensure the greatest possible degree of EU funding for the remaining works. Apart from a precise definition of the principles of eligibility, the so-called Guide for Contractors’ Variations and Claims is also to be applied, which defines the precise conditions and rules of disbursing contractors’ variation requests and claims through EU funding in order to ensure the completion of the project.

Accordingly, additional works, variations and claims will be assessed individually. In order to ensure eligibility, contracts need to be amended if their contingencies are exhausted, though not when they remain unexhausted. On the basis of individual assessment, the former items can be disbursed through EU funding if the contracting parties agree on the sum underlying the claim and the contract was amended in accordance with the stipulations of the Act on Public Procurement or a court ruling has so determined. Claims paid in the excess of contract budgets shall be settled from domestic financing.

Under the new contract, the new total cost of the project, instead of the HUF 373.4 billion, is to be HUF 452.5 billion, which includes all the estimated costs of the contracts concluded and to be concluded in relation to the realization of the project, as well as all currently and expectedly disputed items, contractors’ claims.

In this new total budget, the resources tied up under liabilities resulting from contracts concluded and the general contingency are HUF 342.5 billion, which did not change in respect of former allocations. The costs arising from contracts to be concluded in the future and the estimated sum of the general contingency is to be HUF 42.5 billion instead of the previous HUF 30.9 billion. The somewhat over HUF 11 billion estimated surplus cost is due to the inclusion of the costs of the Unified Digital Radio System, EDR, which was prescribed for the maximum safety of the metro line (HUF c. 1 billion), and the full intermodal junction at Kelenföld, the technical content of which has been reviewed and upgraded by BKK (instead of the HUF 2.7 billion previous estimate, the new, significantly enhanced technical content is estimated to cost a further HUF c.10 billion).

The definition of the technical content of the intermodal junction at Kelenföld and the related professional negotiations had been prolonged for years; for a long time, no budget estimate could be made for it, and, even as now, it is only a design tender that is currently in progress. The new budget includes the estimated costs of the entire intermodal junction, i.e., aside from the exit structure leading to the railway platforms and the junction to the M1-M7 motorways, the combined local and long-distance bus station as prescribed by the European Union, the terminal-like passenger hall and the 1500-place P+R and B+R parking lots. The new contract allows for the eligibility of the intermodal junction for EU funding.

Of the total budget, HUF 67.5 billion is the maximum cost estimate of the claims determined by the engineer but rejected by the contractors, i.e. the maximum risk currently known (including the claims referred to dispute adjudication and arbitration). This is a maximum, theoretical budget framework, which does not mean that the project is going to actually cost this much more. Should any claimed sum be agreed by the parties, a given contract can only be amended on the basis of a procedure to enforce a claim with the exclusive approval of the Cabinet Committee for National Development or the Hungarian Cabinet.

The new contract lays down 31 March 2014 as the date of commissioning and 31 July 2015 as the final deadline of the realization of the project. It is up until this date that costs arisen and paid can be accounted under the new contract.