1. Executive Summary
- Chinese pay special interest to the development of the logistic-transport sector in the Balkans region. This is shown in the increased investment in infrastructure in recent years.
- Emphasis is on the North-South axis, connecting Greece (port), Albania and Montenegro through highway and railway infrastructure in Macedonia, Serbia and Hungary to Europe
- The main actors present are China Road and Bridge Corporation (CRBC) and its parent company China Communications Construction Company (CCCC), they connect with the governments in the Western Balkans and individual leaders, which are prone to maintain friendly relations with China
- There are threats surrounding the projects: little positive effect on local economy, corruption problems that have erupted on the projects with the Chinese stakeholders in some cases and the Chinese state support for its companies, making them highly competitive
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2. Who are the main actors influencing strategy decision in respect to the transport axis?
1. Chinese companies (state-owned or state-endorsed, supported by diplomatic delegations) involved in the major construction works in the Balkans region are:
China Road and Bridge Corporation (CRBC) and its parent company China Communications Construction Company (CCCC): CRBC is one of the main Chinese actors involved in the projects in several countries. CRBC is a Fortune 500 company, has a strong record in building bridges throughout Asia (CRBC has connected Jinxing and Ningbo in the Zhejiang region of China with one of the longest bridges in the world, Hangzhou Bay Bridge). The company is listed in Hong Kong, audited by Ernst & Young, and declared profits of just over €460 million for the last financial year.
2. Governments of the Balkans countries (EU and non-EU) and the individual leaders, with which China is building a community of friendly countries.
Countries receiving state visits or investments in November 2018 were Croatia, Serbia, Bosnia and Herzegovina, Albania, Greece and Montenegro.
3. European Union, concerned on foreign direct investments from China, as they could mean the loss of both strategic technologies and infrastructure, as well as knowledge in which the EU has invested in the past (innovation and development, especially in tech)
3. What are the goals and sub-goals of the Chinese actors in respect to the transport axis? What do they want to archive?
Focus on port connectivity and the connecting infrastructure is crucial for a rising maritime power like China. Gaining access to foreign deep-sea ports is vital from the mercantilist perspective, as well as a geostrategic asset when it comes to projecting the country’s development model on a global scale. The goal of the Chinese construction companies in the Balkans is to ensure that the cargo coming into ports in the Balkans reaches European markets.
This is done through two different channels:
- Ensuring transportation infrastructure from the ports to Central and Western Europe
Especially trans-European Corridor X is important for the Chinese: it needs to have both the capabilities for cargo transport, as well as increased reliability. Hence the important investments in the region are railways, as they are presenting the most underdeveloped parts of infrastructure – the countries in the Balkans region follow the example of Central Europe and Slovenia and are prioritizing building the road infrastructure first, as the roads are those heavily used by the local populations, tourist etc., but most importantly, railway is usually an investment that does not bring immediate returns. Currently, the only project already in construction is the fast railways Belgrade-Budapest, which should be easily constructed as the terrain is not a difficult one (Pannonian Plain).
- Providing possible alternative routes to the existing Piraeus port
The Chinese are always seeking the alternatives in their functioning: Silk Road has many alternative channels for accessing Western Europe – through Russia, but also through Turkey, for example. If the actors in one of the routes change behaviours and interests, this provides the Chinese with an already well-established alternative trade route. A similar pattern is visible when considering the port access to the Balkans: interest of the Chinese in Port Zadar and Port Rijeka can be seen as representing an alternative to Port Piraeus, under the condition of a good railway connection to both ports – for which Croatia still has to find funding.
Rijeka railway is single-track (which means low reliability of the railway) and has a high steepness. The Croatian government is searching for an alternative in building a lowland railway Rijeka-Zagreb, which would eliminate the steepness issue for the otherwise very appropriate Rijeka Port, which is among the deepest in this part of Europe. This investment would cost around 3 billion euros and the Prime Minister of Croatia, Plenković, in November expressed the desire for the Chinese investment into this infrastructure project. Croatia is not able to provide the funding by itself, while the EU is already co-financing the Zagreb-Hungarian border railway. The port, however, cannot be enlarged, as it is surrounded by the city of Rijeka. Croatia thought of moving a part of the Rijeka port to the island of Krk in close proximity, however, the inadequate infrastructure would become even a greater issue as the island is connected to the mainland only via a bridge, hence they are now thinking of establishing a gas terminal at the same spot (since only a pipeline infrastructure needs to be built for that purpose). Currently, the Chinese are negotiating to rent one of the terminals in the Port Rijeka, however, the outcome has not yet been determined.
On the Port Zadar, the most recent November information state that the Chinese delegation met the government representatives, the representatives of the port’s board and the workers’ representatives. Chinese entered the talks after the recapitalization in July. Chinese company Jiangxiong Hua, indicated recently that it has plans to buy a stake in Luka Zadar and that it would initially invest 215 million kunas (29 million euros).
The Chinese were also interested in the Port Koper in Slovenia, which performs much of its business with Korea, as they are building cars in Slovakia – hence the automobile parts are representing a great deal of the incoming cargo to the port Koper, and the complete automobiles a great deal of its out-going cargo. The Port can be expanded, however, the main obstacle is that it is only connected via a one-track railway, while the second track is yet to be built. The Chinese were interested in the investment into the second track, however, the Slovenian government in 2017 opted for building the double line between Koper and Divača through a public-private partnership involving hinterland countries (that use the Port of Koper) combined with European funds and special port transhipment charges, as well as additional truck tolls.
In neighbouring Italy, the Port of Trieste offers one-track railway connectivity, which is in a worse condition then the Slovenian one. However, while the Slovenian government is planning to upgrade its railways, the Italian government did not yet produce such plans. For the possible second-track of the railway, the construction would have to entail tunnels to bypass the city of Trieste, which is built on a hilly area. The Port of Venice on the other hand offers excellent connectivity and infrastructure, however, it is extremely shallow with only 12 meters depth, which is not enough for the cargo that the Chinese are importing.
In Albania, the Chinese are interested in Durres port, which has the appropriate depth, however, the investment into the port itself would not bring a lot of value as the Albanians did not update their road and railway infrastructure for decades: informal information tells us that out of 170 wagons owned by the Albanian railways, only 60 are in actual use. The road infrastructure performs better (Albania indebted itself significantly for the update).
4. What are the main threats/issues with the transport infrastructure?
Main threats defined with the transport infrastructure construction in the Balkans should be summarized into the concerns about the quality and the origins of the materials – it is now known that the complete steel materials intended for the construction of the Pelješac Bridge will be transported from China to Croatia, while only cement will be bought locally. Secondly, the workers that the Chinese use for the constructions are Chinese workers. For example, in the case of the Pelješac Bridge, they will be transported from China with a cruise ship, which will be resting in international waters, while the workers will be transported to the construction site with small speed-boats every day. This is a significant influence on the size of the possible local revenue when considering the Chinese infrastructure investments.
Thirdly, one of the main threats connected with the transport infrastructure projects in the Balkans are the corruption possibilities: the Balkans are a region in which democratic procedures and transparency in decision-making processes are significantly less developed than in the EU member states; the Chinese decision-makers can take advantage of the current state of affair to introduce their own infrastructural solutions. They might also rely on concluding governmental agreements rather than free tenders. Recently, Freedom House Nation in Transit reports show that Bosnia and Herzegovina, Kosovo and Macedonia are understood as 'hybrid regimes', while Montenegro and Serbia are considered 'semi-consolidated democracies'. This is the consequence of a wide-spread corruption that captures also political systems and independent institutions, political influence over the judiciary, weak law enforcement that should be crucial in the free market establishment. Any investments in the region should be perceived through that lens, especially as the region is considered as an essential transit route from northern to southern Europe.
Last but not least, the main concern deriving especially from the EU is that Belt and Road Initiative terms for countries and individual investments are negotiated directly with either the Chinese government or state-owned or state-sanctioned firms to which the Chinese state can assist for increasing their competitiveness. One of the examples, again concerning the Pelješac Bridge are Strabag of Austria and Turkish-Italian consortium of Astaldi and IC Ictas, which lodged an appeal to the EU State Commission for Control of Public Procurement Procedure since the low winning bid from CRBC was supposedly backed by Chinese state aid, saying that according to the EU law, the Commission had obligation to question unusually low prices.
5. How do the main actors plan to reach their goals and solve the issues? What are the opportunities and threats of these strategies?
Chinese actors: the Chinese stepped up with their investments in infrastructure in the region in 2018, looking at the map of the planned or already started transport infrastructure investments in the region: China aims to enhance a transport route through Central and Southeast Europe, and south all the way to the Mediterranean Sea. To the north, China’s projects include a rail corridor and the building of a transport infrastructure network in Central, Eastern, and Southeast Europe. There are several threats connected to the strategic infrastructure network: China needs to take into account countries’ specifics (language, culture, political systems) and differing legislations on tenders across the EU and non-EU member states. However, with establishing these transport routes, China guarantees itself an alternative route to the European markets (more on this under point 2.2).
More recently, China’s Power Construction Corporation (Powerchina) also expressed interest in participation in the construction of transport infrastructure in Serbia, namely, construction of a motorway linking Serbian city Niš with Priština in Kosovo via Medare, which would be 77 long link extending to Albanian’s capital Tirana and further to the Albanian Adriatic port of Durres. Serbian infrastructure Minister Zorana Mihajlović already proposed the establishment of a joint working group to discuss the participation of the Chinese company in the project.
1. Local actors: from the part of the local government leaders, some local politicians play a major role in favouring China. The Brussels grants come with strings attached, which are often unwelcome by the political elites of the Balkans. The EU bureaucracy can be slow, which is a problem when governments try to move fast to gain electoral capital, hence the success of the Chinese model is aligned with local political cycles. Nevertheless, there are several threats that the local actors are facing in this regard: one of them is attracting further Chinese investments – it is a known fact that investments into the countries of the 16+1 Platform pale when compared to Chinese investments in Western Europe (for example, between 2000-2016 Germany alone had an inflow of almost €19bn of the Chinese FDI, which is three times more than the investment in 16+1 up to date overall). A possible opportunity in this regard is the need for governments to design their investment strategies more strategically, coordinating their foreign policies to include better both EU and third actors, such as Chinese companies.
2. European Union: one of the sole strategies in place to counter the mentioned Chinese influence in the region came recently from the EU. EU countries agreed on 5 December 2018 to a far-reaching system to coordinate scrutiny of foreign investments into Europe, notably from China. Under the plan, the European Commission would investigate foreign investments in strategic technologies and infrastructure such as ports, while the countries would also be obliged to provide an annual report to the Commission, which would be able to give its opinion if a third member state country would express concerns about the planned foreign investment. The negotiators for the European Parliament and the EU’s 28 member states struck a deal last month to protect critical sectors, however, it was not clear whether a sufficient number of countries would back the compromise, given opposition from some including Cyprus, Greece, Luxembourg, Malta and Portugal. Some of the opponents have welcomed Chinese investment, such as Greece, whose largest port Piraeus is majority-owned by China’s COSCO Shipping, but only Italy and Britain voiced reservations on 5 December. Parliament will vote on the proposal in February or March. It seems that also the skepticism towards the Chinese engagement coming from the part of some member states is paying off, since the EU was invited to engage in the 16+1 as a summit observer and with 2018 Sofia summit guidelines for the first time stressing also the need for a reciprocity of market access, balanced trade and open tenders in infrastructure construction, which echoes EU concerns over cooperation with China.
6. Strategy options for EU decision-makers.
- EU actors should re-engage with the Western Balkans through a wider discussion and policy re-think. There are many existing instruments, already designed and adapted in different EU financial perspective, stimulating intraregional and regional cooperation within EU and with non-EU countries (e.g. INTERREG, HORIZON, ERASMUS, smart specialization etc. project and support). However, a clearer vision to the EU membership to the Western Balkan countries with releasing a part of the pre-accession funding for infrastructure would be one of the options to fill the blank space for investments obviously present in the Balkans
- Continue with the screening investment mechanism and include it as a part of the pre-accession process into the negotiating chapters meant to assist enlargement countries to establish a society based on the rule of law (Chapter 23 – judiciary and fundamental rights and Chapter 24- justice, freedom and security). Key requirements for the EU membership include the rule of law and are already set in the Copenhagen criteria, hence the potential member state should follow also the screening measures that prevent them from disrupting the strategic sectors of the countries and enable fight against corruption before their actual accession
- select an appropriate research question for each hypothesis, strategy option or forecast that you are contributing to the debate
- if possible, state the source of your knowledge
- write in the format of bullet points