June 14, 2011 10:16 pm

China group sees collapse of Poland ambitions

A high-profile attempt by China to break into the European transport infrastructure market has turned into a fiasco after Poland cancelled a controversial highway contract with a Chinese company midway through construction.

China Overseas Engineering Group (Covec) was awarded the contract to build a 50km stretch of the crucial highway between Warsaw and the German border in 2009, after presenting a bid so low that rivals took allegations of price dumping to Warsaw and Brussels.

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It was the first Chinese company to win such a large European highway contract and had hoped to use the project as a calling card to gain other business in the region.

However, the company – a subsidiary of China Railway Group, one of Asia's largest construction and engineering companies – quickly ran into financial difficulties once construction got under way and halted work in May. Poland’s road building authority cancelled the contract on Monday.

The collapse of the contract is an embarrassment for Donald Tusk, Polish prime minister. Mr Tusk had pledged to complete the highway before next summer’s European soccer championships, which Poland is co-hosting with Ukraine.

Opposition parties have seized the opportunity to attack the prime minister with relish, hoping to dent his popularity before this autumn's parliamentary elections.

Covec won the contract after presenting an extremely low bid, coming in at less than 50 per cent of the 2.8bn zlotys ($1bn) budgeted by the government. The bid prompted complaints from rivals, who said the Chinese were price dumping because it was impossible to build so cheaply.

Germany’s Committee on Eastern European Economic Relations, an industry body, had alleged last year that state-owned Chinese companies were securing contracts in the region “via price-dumping, aggressive financing and generous risk-guarantees”.

Warsaw and Brussels rejected the highway objections. However, in the event Covec quickly ran into financial difficulties, delaying payments to subcontractors and claiming the road building authority was itself late paying. The agency denies the claim.

Covec recently tried to renegotiate the contract, saying raw materials were unexpectedly expensive and that it had been unfairly treated. But the government rejected the move, saying it could open the way for similar negotiations from companies building hundreds of kilometres of roads around the country.

Covec on Monday issued a statement saying it was ready to resume work, but at a cost. However, speaking on local television, Andrzej Majewski, deputy director of the General Directorate for National Roads and Motorways, said: “One has to finish the contract which was agreed, for the price that was agreed, with the conditions that have been described.”

The agency is demanding 741m zlotys in damages from Covec, and is in talks with 16 companies with a view to restarting construction by the end of July.

The government is now aiming for the road to be “drivable” rather than complete in time for the soccer tournament’s opening match in Warsaw in June 2012. “Drivable means safe,” said Cezary Grabarczyk, the embattled infrastructure minister. “Work will be continuing on embankments.”

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