Chinese investment in SEE – roads, coal and debt

By Radomir Ralev

Though located in а strategically important part of Europe where trade routes from Asia and Africa meet, Southeast Europe (SEE) still has an underdeveloped transport infrastructure that restricts the region’s economic growth potential. A study by the European Investment Bank (EIB) suggests that infrastructure investment has a positive correlation with the economic growth of the countries of the Western Balkans as well as the wider SEE region. Infrastructure projects in the region attract foreign investment from both the EU and China (fig.1). However, the value of infrastructure investments in SEE countries still stands at around 1% of GDP, probably due to the long-time needed for the planning of large projects.


Chinese investment in SEE

SEE countries score poorly in the infrastructure segment of the World Economic Forum’s Global Competitiveness Index, dragged down by the low quality of roads, limited efficiency of train and seaport services and poor airport connectivity. With an average infrastructure score of 68.9 versus an EU average of 80.9, the region’s underdevelopment seems obvious (fig. 2). SEE countries also lag behind the Central European states in terms of infrastructure competitiveness. The average index of the Visegrad Group states is 79.7, while Albania’s score of 57.3 is the lowest in Europe followed by Bosnia’s 60.7 and Montenegro’s 62.2. EU member Bulgaria stands at the bottom of the bloc’s ranking with a score of 69.9.

EBRD, one of the largest institutional investors in the region, is active in the field of urban sustainability, supports the inclusion of women in business, develops accelerators and incubators, but also finances large infrastructure projects like Corridor Vc in Bosnia, the managing director of the EBRD for Central and Southeast Europe, Charlotte Ruhe, said at a discussion panel in the framework of the bank’s Annual Meeting and Business Forum in Sarajevo in May.

Global Competitiveness Index - infrastructure segment


“In the region, connectivity is very important and there is certainly a need for investment capital,” Ruhe stressed. The improvement of the quality of traditional infrastructures such as energy and transport is in the focus of two important regional investment initiatives — the European Western Balkans Investment Framework (WBIF) and China’s Belt and Road Initiative (BRI), envisaging 8 billion euro of loans each.

However, BRI projects draw criticism over concerns about the risks of unsustainable debt burdens for some countries, as well as fears of growing dependence on China and Beijing’s political influence. Moreover, according to Austria’s Central Bank, the execution of construction works by Chinese contractors, suppliers and workers and the use of Chinese materials may significantly reduce the economic benefits for the region. A study by The Vienna Institute for International Economic Studies (WIIW) shows that the most important contractor in the transport sector under BRI is China Communications Construction Company (CCCC). In the energy sector, the leading contractor is state-owned China National Machinery Industry Corporation known as Sinomach.


SEE is lagging behind Central and Western Europe in the energy sector as well, though at a much lesser extent than in the transport sector. In terms of electricity production per head the region’s countries are in the middle and lower range of the distribution, as only Serbia is close to the lead group of CESEE countries. China is involved in energy investments in the region, but most projects are related to the construction of coal-fired power plants, thereby counteracting energy-related EU projects that are aiming to support the shift towards a low-carbon economy, the WIIW said in a report in November 2018.

According to Ruhe, the construction of China-funded coal-fired power plants in SEE, like the one in Bosnia’s Tuzla, is not the best way to support the region, as it has serious problems with air quality. In March, the Energy Community Secretariat sent an open letter to Bosnia expressing its concerns about the compliance with state-aid rules of a public guarantee granted to China’s Ex-Im Bank on a loan for the Tuzla TPP project. In August 2018, the government of Bosnia’s Federation entity decided to provide a guarantee for a 614 million euro loan from the Chinese bank to Bosnian power utility EPBiH, to be used to finance the construction of a 450 MW unit at the existing Tuzla TPP. The loan will finance 85% of the total cost of the project.

“This region has air quality issues, it has some of the worst pollution in cities on the planet in North Macedonia and Kosovo. When we talk about climate change and the need to move away from fossil fuels, renewables are a life-saving alternative and not just a nice thing to have. We are working a lot on renewables, but we also need private investors and the government’s support to realise the projects. But we see the news that there will be a coal-fired power plant in Tuzla and we ask if this is the best way to power that part of Bosnia,” Ruhe said.

Pozega-Boljare motorway project



In September 2018, Moody’s changed the outlook on Montenegro’s B1 long-term issuer and senior unsecured debt ratings to positive from stable, but warned against the costs of the priority section of the Bar-Boljare highway in the country being built by China Road and Bridge Corporation (CRBC). The risks include possible delays with cost overruns as well as foreign currency risks associated with the dollar-denominated loan from the Export-Import Bank of China in 2014. The loan caused an increase of Montenegro’s foreign debt and forced the government to raise taxes, partially freeze public sector wages and end a benefit for mothers. The overall costs of those sections are roughly estimated at around 1.2 billion euro, or 25% of GDP.

The currency risks associated with Chinese projects were among the concerns expressed also by Guenter Deuber, Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International.

“China’s investments in the region are concentrated in construction and in some countries the numbers are close to what the EU has on the table. We, as a bank, would be definitely happy to help Chinese companies to access the local markets. In the parts of the world where China is successful, there is a heavy reliance on US dollar financing. Here in the region we have a much larger dependence on euro financing, so possibly here we need a different way of interaction,” Deuber said at the Sarajevo meeting.

Serbia absorbs 56% of Chinese investment in the construction sector in CESEE, chiefly due to the $1.8 billion project for modernisation of the Budapest-Belgrade railway which should be completed by 2023 (see Fig. 2). The investment in the Serbian section of the project amounts to about $1.1 billion. Slovenia ranks second in terms of BRI investments with a 14% share, followed by Bosnia, Croatia and Romania with 9%, 5% and 2%, respectively. The vast majority of the projects are either in energy or transport.

Bar-Boljare motorway



According to Deuber, Beijing is gaining more importance on the SEE markets through BRI but the same does not apply to the SEE countries when it comes to their exports to China.

“China is getting a decent share of the local import market. This is not the same as exports. SEE countries do not get much more weight on the Chinese market. Most of the SEE countries are running high trade deficits with China and this puts the question to what extent it makes sense to have too much further engagement of China in the region as this may deteriorate trade balances further,” Deuber noted.

While Chinese projects have tended to come with concessional financing, they have also tended to be treated outside of the normal project selection processes or procurement procedures, and (as in Montenegro) without full attention to debt sustainability considerations, the International Monetary Fund (IMF) said in a report on public infrastructure in the Western Balkans. High reliance on Chinese contractors can also limit projects’ impact on the home economy during the construction phase, the IMF said.

The participation of Chinese contractors in BRI poses significant risks in SEE which were initially underestimated, the managing director for Economics, Policy & Governance of the EBRD, Mattia Romani, said in Sarajevo. In his opinion, the perceptions about BRI have changed since the introduction of the project by Xi Jinping in 2013, as the investments have not been channeled through the private sector, but through Chinese state-owned enterprises and banks. In this way, the principles of openness, environmental sustainability, support for cooperating countries have been undermined.

“There are risks linked to the social acceptability of the investment, job creation, environmental and social standards. But also simply the fact that most of the investments are in the construction sector. Chinese companies have mostly experience on the domestic market, in a culture of learning by doing without efficient cost control and project preparation,” Romani said. A stronger risk management is needed across the value chain for investors and companies, but also better project preparation, complying with investment standards, community engagement, openness of data and transparency, he added.

According to Ruhe, the preparation of projects under BRI poses a major risk, while the capacity of SEE countries to maintain large infrastructure projects needs to be reinforced. “Building the best road in the world is not the best investment if you do not maintain it properly. We, at the EBRD and the World Bank, are using our resources to help develop that capacity, to prepare the projects and employ local people in the construction. We are working to ensure that those projects are meeting certain transparency and social standards. If you are going to work in Europe, you have to follow European rules. This is what we offer and would encourage when possible for the Chinese policy-makers to work with us on projects that they want to do so that we can ensure that those European standards are met,” Ruhe said in Sarajevo.

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