APAC: News Analysis: China’s push into CEE infrastructure

01 June 2018 - 12:00 am UTC

Concerns over Central and Eastern Europe’s rising debt dependency and bid transparency could cast shadows over the future of China-backed infrastructure projects in the region, reports Celine Ge. 

A flurry of Chinese infrastructure developers and sponsors have flocked into Central and Eastern Europe (CEE) in recent years.

The region boasts low cost, skilled labour and is a gateway to the EU, a source at ​​​​​​Everbright International says as he explained the company’s plan to expand in the CEE. 

While deal-making activity by China-backed infrastructure investors seems to be in full swing, the years ahead are likely to see a shift in focus.

Concerns about rising indebtedness to Chinese entities are rising. Lingering political instability in the Balkans – which has been a focus for investment – and stringent environment and tendering rules in EU member states are increasingly hampering implementation of China-led projects.

Facing tight fiscal budgets, Balkan nations such as Serbia and Albania are increasingly looking for private sector involvement in infrastructure through concessions. That would appeal to Chinese players seeking opportunities abroad in the wake of the tightening PPP regulatory regime at home.

Chinese bidders are likely to gain an upper hand in tenders if they can demonstrate their capability to increase demand or traffic for projects besides their financing and constructing prowess, notes Agnieszka Gajewska, partner and CEE Leader, Public Sector and Infrastructure with PwC. That will be particularly true in airports, ports and other commercial infrastructure deals.

It would be better for China-backed players to focus more on small ticket deals in focused sectors, advises Liu Zuokui, director with the Beijing-based “16+1” think tank, rather than chase big projects as they have done.

 

16 plus one

China has long maintained diplomatic relations with the 16 former communist states, contributing to a relatively open attitude toward Chinese investment. 

“It is worth noting that CEE governments tend to be less hostile to Chinese infrastructure investment compared with their Western European counterparts,” writes Fang Qiucheng, president of China International Contractors Association in a note.

 

CEE governments tend to be less hostile to Chinese infrastructure investment

 

Cooperation has strengthened since 2012, when Chinese premier Wen Jiabao hosted the first “16+1 Summit”, promoting cooperation between China and the 16 countries in CEE.

The annual event is attended by senior officials from 11 former communist countries in the EU as well as five Balkan nations namely Albania, Bosnia and Herzegovina, Macedonia, Montenegro and Serbia.  

Renewed interest has been driven by the Belt and Road Initiative, launched in 2013. As part of this initiative, China’s Premier Li Keqiang pledged increased financial backing for CEE infrastructure projects at last year’s 16+1 Summit.

The agenda played up by Beijing has underwritten a wave of infrastructure investments by Chinese state-backed entities into CEE.

“Chinese investors are actively searching opportunities in the whole Central Eastern Europe and the Balkans,” says PwC’s Gajewska. “Currently, we have witnessed the interest mainly come from transportation – such as toll roads, rail, ports, airports – and energy sector including thermal power and green energy,” she observes.

Stricter environment and tendering rules in EU member states have driven Chinese companies to focus more on non-EU countries such as Serbia, Bosnia, Montenegro, Belarus or Eurasia in order to avoid regulatory risks, experts observe.

 

Funding support

Investments by Chinese state-owned entities have been backed by heavyweight financiers such as policy lender China Development Bank (CDB) and the Industrial and Commercial Bank of China (ICBC).

CDB has played a more active role in CEE infrastructure financing since early 2012. It offers special schemes focused on CEE countries, offering low interest rates and long-term loans for projects undertaken by Chinese investors or contractors.

Private equity funds such as China-CEE Investment Cooperation Fund and Sino-CEEF Holding were also launched to back Beijing’s CEE infrastructure push.

The underdevelopment of the region’s transport, electricity and telecom infrastructure also meets the need of Chinese infrastructure giants which are seeking to export their excessive capacity, according to Jiang Jianqing, the former chairman of ICBC who now heads Sino-CEEF Holding, which manages the Sino-CEEF Fund.

With its entry into Poland (2012) and Czech Republic (2017), ICBC stepped up its CEE push with the launch of the Sino-CEEF Fund in November 2016. The fund had EUR 3bn committed by May 2017 and counts Shanghai conglomerate Fosun and China Life Insurance among its LPs. 

The fund, intended to “support CEE infrastructure and capacity cooperation under the Belt and Road”, has been in talks with potential LPs from Poland, Czech Republic and Latvia to hit its final close target of EUR 10bn (USD 11.68bn) according to ICBC. It has shown an interest in equity and mezzanine debt investments in Polish, Bulgarian and Hungarian assets. 

The older China-CEE Investment Cooperation Fund – set up by China Eximbank in 2013 – has already played an active role in the region’s infrastructure. The USD 435m fund invested EUR 309m in 250MW wind farms in Poland as well as three solar plants with 61MW combined capacity in Czech Republic. The energy and telecom-focused fund is targets USD 1bn for its second phase. It is funded by China Eximbank and has also attracted commitments from the Hungarian Eximbank and Silk Road Fund.

Meanwhile, the Bank of China became the first Chinese bank to set up a branch in the Balkans, launching its operation in Serbia last year. It has also signed an agreement with the Hungarian government to finance Belt and Road projects in the country.

 

Transport

So far, Chinese infrastructure investors have demonstrated a preference for greenfield or brownfield transport and energy projects with significant expansion or reconstruction plans that could benefit Chinese EPC contractors, market insiders observe. 

Chinese shipping giant COSCO bought a majority stake in Greece’s Piraeus Port Authority in 2016. Meanwhile, CCCC plans Romanian’s Constanta port expansion and China Everbright’s COIF acquired Tirana International Airport serving Albania’s capital. 

CCCC flagship China Road and Bridge Corporation (CRBC) signed agreements to invest USD 3bn in highway projects last year including one linking Belgrade to the port of Bar in Montenegro.

The Montenegro government plans to develop the remaining section of the Bar-Boliare motorway in partnership with Chinese firms under the PPP model following completion of the first section by CRBC.

China Railway Engineering Corporation joined private-sector builder Pacific Construction in January, to invest in the Albania section of EUR 3bn Blue Corridor project – also known as the Adriatic–Ionian Highway – in the form of PPP.

Months later, Sinochem’s agreed take a majority stake in Bosnia’s EUR 320m Banja Luka-Prijedor motorway PPP, to be built by China’s Shandong High-Speed Group. 

 

Renewables

Environment and renewable assets including waste-energy, wind farms and solar power plants in CEE are also becoming a favourite of Chinese investors that are seeking to gain technology know-how and access to the surrounding EU market, according to market watchers. 

Everbright International acquired Polish waste treatment firm Novago in 2016. China Machinery Engineering Corporation (CMEC) is mulling a 200MW solar plant in Ukraine and two 50MW wind projects in Bosnia. Chinese firms have also invested in hydro and thermal plants in Macedonia and Bosnia-Herzegovina. 

China Three Gorges unit China International Water & Electric has expressed its interest to develop Serbia’s Dabar 159MW hydropower project along with 12 hydro plants on the River Vardar along Macedonia’s border with Greece.

Both state-owned Poly Group and Norinco were keen on renewable projects in Montenegro and have plans to invest in thermal and hydropower plants on Bosnia’s Moraca and Komarnica rivers. 

 

We have recently seen increased interest in Ukrainian solar power due to very attractive support system currently offered by the government

 

More are bound to come. Asia’s largest wind firm – Longyuan Power – is scouring wind assets in CEE. The company plans to focus on countries where “political and economic situations are stable with comprehensive legislation and big growth potential,” chairman Qiao Baoqing observes.

Rival China Datang is also seeking to invest in projects with a capacity of about 100MW in the region, according to a company source. 

“We have recently seen increased interest in Ukrainian solar power due to very attractive support system currently offered by the government,” observes PwC’s Gajewska. CMEC and China Nuclear Technology Corporation are among major Chinese players looking to solar power investment in the country. 

Investment in renewables is more dependent on the support mechanisms from the local governments particularly grid infrastructure. “These (renewable) investments require a long-term view and a thorough understanding of underlying risks,” Gajewska notes.

 

Headwinds

China’s investment in the region faces a new wave of headwinds. European attention to fair and transparent practices was exemplified by the European Commission’s investigation in February into whether, by picking Chinese contractors to build the USD 2.9bn Belgrade-Budapest HSR, Hungary had broken EU laws requiring public tenders for big infrastructure projects. 

Critics argue Chinese companies could profit from multimillion dollar contracts while sidestepping standards upheld by European players.

A report, prepared for the European Bank for Reconstruction and Development (EBRD) warns of Beijing’s “excessive influence” in CEE. It calls for a “pro-active approach” by the EBRD to achieve a win-win situation with Chinese resources flowing into the region.

The IMF has warned that China-led infrastructure projects are partly to blame for growing debt risks facing Western Balkan nations.

One example, the IMF highlights, is the Beijing-funded Bar-Boljare highway, without which it forecast Montenegro’s debt would “have declined to 59% of GDP in 2019 instead of rising to 78%.” 

The Belt and Road has already raised fears in Brussels that China’s growing influence will also divide the EU, with worries that Beijing is on a collision course with EBRD and EIB that have their own infrastructure funding schemes for existing and aspiring EU members.

“The EBRD is already engaging with Chinese companies and authorities along the Balkan Silk Road,” an EBRD statement says. “Tenders now being awarded focus minds on the need to carefully weigh up the opportunities and challenges brought by the emergence of a major new player in the region.”

CEE