Even Chinese headlines sometimes highlight economic failures. These capture attention when they happen for two main reasons: they are rare and public sensitivity on these issues is now large. The media coverage is merciless, and this is an evident signal that a maturing society is in progress. So headlines – and ironical remarks – are bountiful on the most dramatic cases of losses.
Last month, the national body for motorways in Poland has unilaterally terminated a contract bond with the China Overseas Engineering Group Company (Covec). The latter is a consortium formed by the Shanghai Construction Group and the China Railway Tunnel Group, and it belongs to the China Railway Group, a large state-owned group. Coveco represents the first choice for civil engineering in China. The contract foresaw the construction of a section (91 km from Łódź) of the A2 highway linking Berlin and Warsaw. The infrastructure is strategic for Poland and should be completed by mid-2012, when the European football championships will be held in Poland and Ukraine. It is a unique opportunity for Warsaw to celebrate its achievements and reaffirm its weight as a Central and Eastern European pole. Negotiations with the Chinese consortium have proven laborious, as the allotment was hindered by internal resistances that now came to light.
Covec has been accused of omitting payments to local workers, delivery delays and poor quality of materials used. The charges were rejected but they have caused work suspension and contract assignment to other parties. Beijing’s dream to penetrate the European construction market, the most lucrative in the world, experienced an unwanted setback. The Chinese offer was much more cost-effective that those of the European competition. It was structured on previous experiences in Africa and Asia, where the required standards, both business and construction, are less demanding. Covec will probably have to suffer a contract loss of nearly $ 500 million, but, most importantly, China will now have to work very hard to dispel the image of a country that is still far from a guarantee of quality.
Another failure in Arabia amplifies the previous one. Echoes of the railway built in Saudi Arabia, the 19 km of the Mecca Light Rail designed to carry the millions of pilgrims travelling to holy destinations of Islam, have not been suppressed yet. The line has been in regular operation for a few months by now. It was also built in record time on a difficult track. The project, however, resulted an operating loss for China Railway Construction Corporation Limited (CRC) of over 400 million Euros. The financial disaster was caused by a wrong assessment of costs. Political aspects have prevailed, as the agreement was signed in the name of an increased cooperation between China and its most important supplier of oil. The political sphere, however, fails to absolve the company’s obligations. Although the state enjoys majority ownership, CRC is also a public company listed on the Stock Exchanges of Hong Kong and Shanghai; as such, its shareholders will not be happy to record losses caused by non-economic reasons.
In both of the cases described, China was faced with impasses that it is not accustomed to handle. Confident and proud of its successes, it upheld the misguided belief that the mechanical application of old methods could be universally applied with successful results. Conversely, operating on a global scale implies new responsibilities and different approaches that cannot be conceived and structured in secret meetings in Beijing.
A first step in the right direction is represented by speedy and serious internal repercussions that followed the contractual accident in Poland. Covec’s President, Fang Min Yua, was removed from his office. Furthermore, Sasac (State-owned Asset Supervision and Administration Commission), the powerful governmental body supervising the activities of state-owned enterprises, launched an administrative and auditing investigation to understand the reasons behind what now appears to be an excessively generous bid, biased downwards for the sake of securing the tender.