The Budapest M4 metro: a study in inefficiency and waste

March 29, 2014

Orbantarlos

Hungarian Prime Minister Viktor Orban speaking at Friday’s ceremony marking the completion of a 7.4 km segment of the M4 metro.

The City (of Budapest) made every mistake that could be made on a project of this size, falling into every conceivable political and economic trap. 

– Népszabadság, 28 March 2014

During the 2008 Olympics in Beijing Hungarians joked that Beijing had managed to build ten new subways in one-tenth the time it had taken Budapest not to build one.

Originally conceived in 1972 as a means for transporting commuters between Budafok (south-west Budapest) and downtown Pest, the decision to build the Budapest M4 metro was made in May 1991 during the first Demszky administration. Nol.hu writes that the project was started without permits, without the consent of owners, without the necessary management, and without money. With the  exception of the deadline for completing the first section set by Demszky’s successor, Istvan Tarlos, not a single deadline was kept.

In 1992 the Antall government agreed that the State would serve as guarantor for loans the City was contemplating using to fund the construction of the mega-project, with the state repaying the loan principal.  Originally, the section stretching from Kelenföld station in south Buda to Kálvin tér was to have been completed in 1996 in time for the World’s Fair.  However, tenders held in 1991 and 1992 failed to yield a winner prepared to undertake the project on terms agreeable to the City.

In 1996 the first socialist government under Gyula Horn rejected the possibility of Russian companies building the subway with funds provided by the Russian government.

A subsequent feasibility study was prepared on the basis of plans according to which the eastern terminus of the M4 was extended beyond Kálvin Tér to Keleti station.  The M4 subway was now to be 6.7 km long and have 10 stations and was to extend between Kelenföld station in south Buda to Keleti station (Budapest’s famous East Station).

According to the agreement signed between the City of Budapest and the national government in April 1998 the net cost of the project–estimated at HUF 100 billion–was to be divided between the City of Budapest and the National government 40/60.

After municipal elections were held in October of that year, the Orban government announced it was withdrawing from the project after determining it would cost at least HUF 160 billion to complete.

In December of 1998 the City sued the national government for breach of contract.  In 1999 the Pest Central District court ruled that the government had unlawfully terminated the contract which the City court later upheld.

When the national government refused to pay its share of the costs, the City filed a second lawsuit.  After the first level court ruled in the City’s favor, the second level court overturned the decision, ruling that the agreement was invalid because the minister of finance had failed to obtain the necessary authorization from parliament.  This decision was upheld by the Supreme Court in 2001 which ruled that the State was not required to pay if the project could not be completed for reasons beyond its control.

Meanwhile preparations to build Budapest’s 4th metro continued unabated.  In 2003 the City signed a new agreement with the national government, now led by Peter Medgyessy, in which the national government agreed to pay 70 per cent of the estimated cost of HUF 220 billion.  Learning from previous mistakes, the agreement was codified into law in 2004.

According to the law the project was to be completed by 2008. The subway itself was to consist of 15 trains each consisting of four wagons capable of carrying 807 people.

At the time Mayor Gabor Demszky claimed 80 per cent of those living in Budapest supported the project and blamed the first Orban government for delays and cost overruns.

The following year the path of the tunnel to Bosnyak square was altered (thereby adding 0.7 km to the length of the first section) and the depth of the tunnels lowered 21 m in response to lawsuits filed by various NGOs. Poorly conceived and executed contracts enabled various contractors and consortia to extort the City government by simply stopping work every time there was a dispute over payment for work completed.

In 2010, the consortium responsible for drilling the tunnels, Bamco, invoiced the City EUR 50 million (HUF 15.5 billion) for extra work and delays caused by the City’s failure to deliver the various locations on time, which the City managed to negotiate down to HUF 6.2 billion.  (A lawsuit filed by the consortium which drilled the tunnels and built the Szent Gellert square station is still winding its way through the Hungarian courts).

Legal disputes with Siemens over the switching system and Alstom over the subway cars generated tens of millions of forints in additional legal costs.

In 2006 the Budapest Transportation Company (BKV) had signed a contract with the Budapest Metropolis Consortium led by Alstom to purchase new subway cars in the amount of EUR 247 million (HUF 76 billion).  Nol.hu reports that the agreement provided for the city to pay a HUF 30 billion deposit without taking delivery of a single car.

In July 2010 the National Transportation Authority (NKH) rejected Metropolis’ application for a permit to put the subway cars into circulation.  It turns out that the consortium had not built the cars per the original technical specifications, but rather according to its own “philosophy” in expectation of receiving retroactive approval.  However, it was not able to prove to the NKH’s satisfaction that the brakes would operate reliably and safely.  There were other problems as well, including faulty operating software and the fact that the height of the driver’s cabin was lower than originally specified.

Shortly after taking office in the autumn 2010, Mayor Tarlos announced his intention to terminate the contract with Alstom and hold a new tender.  However, the City was prevented from doing so when a French court ruled that the EUR 129 million bank guarantee could not be called down.

Pursuant to the decision, Alstom formally requested that the City Court review the NKH decision.  In the meantime, the City appealed the first level French decision.  The second level court ruled that BKV had lawfully called down the bank guarantee.  Not wishing to lose EU financing, rather than issue a new tender, the city invited Alstrom to negotiate.  A new contract was signed in June 2011 modifying 13 points of the original contract but retaining the main points of the contract in terms of the quantity to be delivered, deadlines, and price.  (Details on which the parties could not agree are currently the subject of arbitration proceedings).

One month after signing the new contract Alstom applied an application for a final permit in which it requested a variance from domestic regulations with regard to the brakes and the height of the driver’s cabin.  The NKH granted the variance “in light of the agreement signed between the manufacturer and the City” in November 2011.

The prescribed 4000 km test operation took place largely in France, during which time anomalies were experienced.  Nevertheless, in December 2013 NKV announced that the M2 subway cars had successfully completed the trial run.  The trial of the M4 cars only began in January and was successfully (if not miraculously) completed just two weeks before national parliamentary elections scheduled for April 6.

This was made possible by changes to the requisite laws so that only 15 permits were required instead of 300.

Pursuant to Mayor Tarlos’s request to Viktor Orban that permits be issued expeditiously, each station was issued an operating permit at the end of January.  The Alstom subway cars and the Siemens operating system completed the trial period by 22 March, thereby removing the final obstacle to delivering the subway before the April 6 election.  Final permits will only be issued once the subway has been running for at least half a year. Only then will the automatic, driverless mode be activated.

By 2010 the estimated cost had increased to HUF 370 billion.  According to the contract signed in December 2012 between the National Development Agency and the City government the total cost of the project is HUF 452.5 billion.

Nol.hu writes that originally certain tasks related to the M4 metro project were to have been completed by various district governments as part of city rehabilitation programs (renovation of the Bela Bartok ut, Fővám and Baross squares), and that some of the stations that were original intended to be built on several levels were redesigned to become open space, each with its own special design element.  The change in exchange rates (originally calculated with HUF 248 to the Euro) also exploded the cost.

According to Nol.hu “the City made every mistake that could be made on a project of this size, falling into every conceivable political and economic trap.”  Having initially underestimated the cost of the project, the City practically had to abandon all other projects in order to complete the M4 metro. When a new feasibility study prepared for EU funds did not verify earlier calculations of return on investment, numerous components deemed non-essential were omitted from the plan (including the construction of a P&R facility at the Kelenföld station).

Construction of the project began in March 2006.  The boring of the tunnels began one year later, several months before applying for EU funds, because the City could not wait any longer as it was required to pay large penalties in case of delay.

Problems with ownership caused a six month delay during which time the company drilling the tunnel could not work in Kelenföld.  Delays in completing the Őrmező intermodal hub caused further delay.  They were not able to make up the delay.

Construction of the tunnels and stations were interconnected as the drill could only proceed once construction of the station reached a certain point.  Construction of the station could only be resumed once the drill left the station.  This required careful planning and precision which, on the whole, was lacking.  The result was that schedules were continuously upset with delays in building the tunnels.

To make matters worse the City contracted with the consortium in the absence of the necessary permits and building areas.  The fact that no schedule was prepared for obtaining the necessary properties and that it took years to obtain valid permits caused delays of 3 to 8 months per station.  In some cases, it was Bamco that caused the delay as in the case of the Szent Gellert Square station.  Sometimes disputes between Bamco and DBR, the consortium responsible for building the stations, over cost allocation held up work for months.

The project was also beset with misfortune.  During construction there was a ground collapse at the Tétényi úti station. Nol.hu reports that one of the technical university’s buildings sank to the point where they considered condemning it.

Upon winning the election in 2010 Fidesz announced that it would not stop the project but that it would audit work performed to date.  An audit conducted by the state auditor (ÁSZ) resulted in a charge of malfeasance against an unknown perpetrator being filed with the City Prosecutor’s office.  (An investigation into the Alstom contracts is ongoing).

The state auditors found fault in the contracts which they said provided for work to be paid for in a manner disproportionate to its completion, causing damage to the State and the City.  They especially objected to the large number of consulting contracts and the fact that contracts concluded with contractors allow them to invoice the City for work whose cost had not been determined.

The Demszky government rejected the findings of the state auditors which it accused of having a political agenda.   

As candidate for Mayor in 2010 Istvan Tarlos announced that “we must finish the M4 subway, however misguided the project may be.   The completion of the first section is so advanced that shutting it down would not result in any savings.”   However, this did not prevent the Tarlos administration from penalizing Siemens some EUR 30 million (HUF 10 billion) for delays in connecting the subway to electricity and delivering the tracks and switching system.

After Budapest Transport Center (BKK) director David Vitez (a relative of Viktor Orban) concluded that completion of the second section was not a condition for obtaining EU financing for the first section, the planned western extention of the subway as far as Budaörs was abandoned.

Now that the first section is completed, the government hopes to receive some HUF 181 billion in EU funding by the end of 2015 (which is the deadline for accounting for all funds spent for the funding period ending in 2013).  However, there is a danger that Brussels will withhold some or all of this money.  According to nol.hu out of 50 contracts signed, only 39 were awarded through public tender.  Key parts of the project approved for EU funding have yet to be completed, including the Kelenföld intermodal hub, including the P&R facilities mentioned earlier. Furthermore, the support will only be forthcoming if the project succeeds in achieving certain goals with respect to decreasing vehicular traffic and improving air quality.    

Referenced in this article:

Budapest birtoka bette az új metrót, nol.hu, 28 March 2014

A metro, amely túlnőtt önmagán, nol.hu, 28 March 2014

Vezető nélkül, hvg.hu, 29 March 2014, no. 13. pp. 51-52