Poland: The motorway that China couldn't build
16 June 2011
The construction of the A2 by the COVEC Group was supposed to herald the Chinese construction giant’s entry into Europe. But the company, which underestimated the mysteries of Polish public tenders, has been forced to suspend work on the project.
From the outset, this motorway has been dogged by bad luck! First, construction was delayed until Jaroslaw Kaczynski’s government [2006-2007] decided to seek bids from private companies, who were to be offered a public service concession. The call for tenders had to cancelled several times for want of investors, and the banks that were supposed to finance the project made themselves scarce.
When the new [Donald Tusk] government took office and the legal situation of the project was made clear, we suddenly realised that the deadline for the completion of work before the Euro 2012 would be very tight. So we decided to divide the motorway into sections to be completed by several different builders.
Then the Chinese came into the picture. COVEC [China Overseas Engineering Group] is an enormous Chinese state conglomerate with an annual turnover of 25 billion dollars, and the world’s third largest construction company. Already established in Asia and Africa, it had made no secret of its desire to enter the European market.
Road construction market dominated by major international groups
So in the wake of a series of inter-governmental meetings in which the Poles did their best to make the plan seem as attractive as possible, COVEC finally agreed to take on the job, initially submitting a bid for two sections of the A2. Needles to say, everyone was overcome: managers at the General Directorate for National Roads and Highways (GDDKiK) were overcome by joy, while the Polish companies in the running were overcome by indignation.
The Chinese had submitted a price that was less than half of the planned budget! “You cannot build a motorway for that price. It was pure dumping. That is why we filed complaints with the Office of Competition and Consumer Protection and with the European Commission,” explains an outraged Wojciech Malusi, President of the National Chamber of Road Management. COVEC provided a detailed response explaining that its economic position would enable it to complete the project using its own funds, and that it would benefit from substantial savings on equipment and raw materials, not to mention on the salaries for Chinese workers, which are well below those for Polish workers.
The road construction market in Poland is dominated by major international groups, most of which arrived in the country when they bought Polish firms or participated in their privatisation. These companies benefit from logistic bases, production equipment and staff that are already in Poland, and if necessary, they can entrust part of the work on their projects to Polish subcontractors. So they were all very surprised to see the Chinese commit to a project without any of this infrastructure.
The atmosphere is tense
Initially, COVEC’s strategy, which was to employ local subcontractors for everything, appeared very simple. But in order to honour the terms of the contract and still make a profit, they had to pay less than the usual rates. When no one came knocking, the Chinese understood that the entire construction sector had closed ranks against them.
Thereafter, they had immense trouble finding suppliers to rent them equipment or sell them building materials. “They are cutting prices, stealing our work and destroying the market, and we have to help them? Not on your life!” says the director of one Polish company, who prefers to remain anonymous. Like all of Poland’s road builders, he believes that the A2 will be first quality Chinese junk.
At the roads directorate and the Ministry of Transport, the atmosphere is tense: the general view is that the Chinese should be able to get the job done, because their prestige is at stake. Either they succeed on the A2, or they will have to abandon the project, in which case they will not be able to take part in public calls for tender. And he EU market, which they were so eager to enter, will be off limits.
The losses will be enormous, and the work will be botched
COVEC has since realised that it was caught in a trap because it failed to take into account several risks. The idea of importing construction equipment and building materials was a blunder: China is too far away, and the machines are not certified for use in the EU. The Chinese parent corporation did not supply funding as planned, and COVEC was forced to wait for payment from the GDDKiK [General Directorate for National Roads and Highways] before it could move forward. Worse still, the Chinese had not factored in the impact of rising fuel prices.
Last year, the cost of asphalt rose by 100%. Then there were tax and VAT hikes and higher prices for cement and steel. For the moment, the Chinese are keeping their heads up. They smile and explain that they are taking their first steps in a European market where they will need to learn the ropes, and they have no intention of dumping: for proof look no further than their bid to obtain the contract for Warsaw’s second metro line, which was undercut by the competition.
As for the motorway, they insist that it will be of good quality and completed on schedule. However, their competitors maintain that this is a fairy story. The losses will be enormous, and the work will be botched. In short, the road of Sino-Polish friendship will be a disaster – which is exactly what the competition wants to see.