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The Warsaw Voice » Business » June 30, 2011
Business & Economy
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Chinese Builder Drops Polish Freeway Project
June 30, 2011   
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The Polish government has canceled a politically-sensitive contract for building a key stretch of freeway with China Overseas Engineering Group Co. (Covec)—the first Chinese firm to win a major public works deal in the European Union.

The move came after the Chinese company, which claims it has been treated unfairly by the Polish authorities, stopped work on the A2 freeway in central Poland and said it was withdrawing from the deal in early June.

The freeway project is badly needed by Poland as it prepares to host the Euro 2012 soccer championships together with Ukraine in June next year. Despite the delay, the government insists the freeway will be completed by the time the championship kicks off.

The Chinese company was contracted to build about 50 kilometers of freeway between the cities of ŁódĽ and Warsaw.

Two years ago, the Chinese company won a tender for building two stretches of the A2 freeway leading to Warsaw (between the Stryków and Konotopa junctions), undertaking to build 50 km for zl.1.3 billion. This was by far the cheapest bid at the time, one that many observers said was unrealistically low.

Problems began in May when the Chinese stopped paying their Polish subcontractors and the project ground to a halt.

And in early June Covec sent an official document in which they terminated the contract with the General Directorate for National Roads and Motorways (GDDKiA), the government agency in charge of the project.

‘Unreasonable payment delays’
Covec said its decision to abandon the project was due to its unfair treatment by the investor, unreasonable delays in payments, and the fact that the General Directorate for National Roads and Motorways underestimated the work load and the value of construction work carried out by the company, in addition to an unexpected rise in the prices of building materials on the market. The Chinese company said it had already invested $100 million in the construction of the Polish freeway.

Covec executives said the company was unable to continue work on the site, but did not rule out returning to the construction site as soon as possible. However, they said this depended on whether or not they would reach an agreement with the General Directorate for National Roads and Motorways on renegotiating the contract.

The Chinese said the value of the contract needed to be increased. However, several days of negotiations failed to produce an agreement and in mid-June the General Directorate for National Roads and Motorways withdrew from the contract with Covec.

Andrzej Maciejewski, Deputy Director-General for National Roads and Motorways, said Poland refused to accept the conditions set by the Chinese firm.

According to Maciejewski, after dissolving the contract, two scenarios are possible for continuing work on the freeway: a new tender or negotiations with potential contractors. Regardless of which method of selecting the contractor is chosen, he said, GDDKiA will seek zl.741 million in compensation from Covec. Maciejewski added that talks are already in progress with potential contractors about completing the A2 freeway. He said that GDDKiA was sending queries to companies building other roads under contracts with the agency about whether they would be interested in finishing construction of the A2.

Prime Minister Donald Tusk said that the Polish government is working hard to overcome the problem created by the Chinese company’s decision to drop work. “To me, the important thing is not to have someone declare that they will press ahead with the project, but to have someone really going ahead with this work,” said Tusk. “Therefore, we will be looking for solutions that respect the law, but at the same time ensure that construction is resumed as soon as possible, no later than July.”

Government determined
Infrastructure Minister Cezary Grabarczyk said that the A2 freeway can still be built in time for Euro 2012. “This is the most important freeway stretch in Poland and it must be ready to roll next year. We will do everything to make sure this is the case,” Grabarczyk said.

It is unclear how the disruption caused by the Covec company will affect Polish-Chinese trade relations, which have recently revived substantially. Polish newspapers recently reported that a consortium of Chinese companies including Covec was interested in investing zl.15 billion in the construction of coal-fired units in Polish power plants. Chinese companies have not only submitted business proposals that involve Polish power plants, but are also ready to invest about zl.20 billion in infrastructure here. In March, the mayor of Warsaw and the Ministry of Infrastructure received official letters saying that Chinese companies are interested in carrying out several large projects in Poland, including construction of a second line for the Warsaw metro system outside the city center.

If successful, these projects would significantly increase the value of Chinese investment in Poland, which for the time being is unimpressive. Chinese companies usually invest in Poland by opening their subsidiaries here or entering into ventures with Polish companies. It is estimated that Chinese companies have invested just over $200 million in Poland to date.

In recent years, a number of Chinese companies have grown to become global players and are increasingly interested in investing abroad on a large scale. With support from increasingly stronger domestic banks, they have been successful in many sectors. The main direction of this expansion is Asia, but Europe, and especially European Union countries, are second on the list. According to various international institutions, Poland is likely to attract more Chinese investment in the coming years, because it is considered to be one of the most attractive investment destinations worldwide, thanks to its robust economic performance.
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