EU sets collision course with China over ‘Silk Road’ rail project

Probe of Beijing-funded Belgrade-Budapest link hits Xi’s hallmark scheme 
By James Kynge in London, Arthur Beesley in Brussels and Andrew Byrne in Budapest

Serbian prime minister Aleksandar Vucic, left, and China's National Development and Reform Commission deputy head Wang Xiaotao launch the Belgrade-Budapest railway project in Novi Sad, Serbia, in 2015

Brussels is investigating a showcase Chinese rail project that aims to extend Beijing’s “One Belt, One Road” initiative into the heart of Europe, potentially putting the European Commission at loggerheads with China.
The commission’s probe is into a planned 350km high-speed railway between Serbia’s capital, Belgrade, and Budapest in Hungary.
The railway is billed as a hallmark scheme under “One Belt One Road”, a $900bn project championed by Xi Jinping, to build infrastructure and win diplomatic friends in Europe, Asia and Africa.
European officials told the Financial Times that the investigation was assessing the financial viability of the $2.89bn railway and looking into whether it had violated European Union laws stipulating that public tenders must be offered for large transport projects. 
“The commission services are assessing the compliance of the project with EU law. The dialogue with the national authorities is ongoing,” said a European Commission spokeswoman.
Any legal setback to China’s first railway project in Europe would be a diplomatic embarrassment for Beijing, which made the railway its cornerstone offering to win support from central and eastern European nations during a summit attended by the countries in 2013. 
At issue for the commission are separate agreements signed by the Hungarian and Serbian authorities. 
But the main focus is on Hungary, an EU member state that is subject to the full rigour of European procurement law. 
As a prospective member of the bloc, Serbia is subject to looser rules.
Failure to comply with EU tender laws may be punished by fines and proceedings to reverse infringements. 
“If push comes to shove and if it turns out that the Hungarians have awarded a public works contract of a particular dimension without tender they will of course have infringed EU legislation,” said a senior EU official.
No contract for the $1.8bn Hungarian section of the railway appears to have been made public. However, a treaty between Hungary and China, dated last year and seen by the FT last week, stipulates that companies designated by each government should “co-operate for the development” of the project.
It adds that two state-owned Chinese companies — the China Railway International Corporation and the Export-Import Bank of China — should act as contractor and financier for the project, which is due to be implemented by the Hungarian State Railways company. 
On Friday, the Hungarian government did not deny the commission’s probe but said it had signed the agreements with China, including an annex explaining how it had complied with EU procurement law, following consultations with Brussels.
Official Chinese media reports have said “a contract” for the high-speed railway between Belgrade and Budapest was signed during a meeting of the “16+1” — which unites China with central and eastern European countries — in Latvia in November.

Disruption to the rail project could sap the impetus behind the “One Belt, One Road” initiative, which Xi hopes will bind China, Europe, the Middle East and Africa more closely by building roads, railways, ports and other links to recreate the spirit of connectivity that prevailed along the ancient Silk Road.
“This railway is a big part of the ‘One Belt, One Road’ project,” said Tamas Matura, assistant professor at Corvinus University in Budapest.
“The Hungarian section is supposed to serve as a masterpiece to show that the Chinese can build according to EU standards,” he added.
The planned railway, which is supposed to cut journey times from Belgrade to Budapest down to about three hours from the current eight, is also important to China in a practical sense.
It comprises a crucial section of a so-called “Land Sea Express Route”, which China agreed in 2014 to build with Hungary, Serbia and Macedonia.
This route is aimed to link up with Piraeus, a Chinese-owned Greek port on the Mediterranean.
Without the Serbian-Hungarian rail link, China could struggle to realise its aim of being able to export products by rail to Piraeus and thereafter by sea to destinations in Europe, Africa and beyond, analysts said.
The Brussels probe into Hungary’s tender procedures is not unprecedented.
Viktor Orban, the prime minister, attracted EU scrutiny in 2014 for awarding contracts to build a €12.5bn Moscow-funded nuclear project to Russian state-owned energy company Rosatom, also without holding a public tender. 
The commission launched infringement proceedings against Budapest on suspicions that the project breached internal market rules.
But it closed the probe last December, accepting Hungary’s arguments that only the Russian operator could provide the specific technologies required.
The project is still subject to a separate state aid investigation.