Trophy Infrastructure, Troublesome Debt: China Makes Inroads in Europe

Beijing is constructing parallel financial and commercial networks across Central and Eastern Europe to challenge the global order
By James T. Areddy

BELGRADE, Serbia—Europe is distracted by internal discord over immigration and its tense relationship with Russia and the U.S. 

Seeking to fill the void, China is taking advantage of a historic opportunity to wedge itself into the heart of the West.
Deal by deal, applying experience honed in Asia and Africa, China is constructing parallel financial and commercial networks in Central and Eastern Europe to challenge the global order. 

It has taken footholds in more than a dozen nations on the periphery of the European Union. 

Some, such as Hungary, are smaller, more marginalized members. 

Others, including Serbia, are on the runway for admission.
Chinese workers set a highway through Montenegro’s impassable mountains on pillars as tall as a 50-floor skyscraper—part of an emerging corridor of highways, ports and rail lines that outlines a new Chinese trade route between Greece’s Aegean coast and Latvia on the frigid Baltic.
Chinese technology governs a new international money-transfer system in Serbia. 

Chinese banks gobbled up a newfangled issue of yuan-denominated bonds from Hungary. 

Outposts like Košice, Slovakia, are now stops for freight trains from China.
Beijing’s offers of trophy infrastructure and financial lifelines to troubled economies give those countries proposals they aren’t hearing from Washington and Moscow, which both generally view the region through prisms of national security. 

Nor are they hearing such proposals from Brussels, preoccupied with fraying EU cohesion.

Serbia’s Aleksandar Vučić and Chinese Premier Li Keqiang at a 2014 ceremony to open the China-Serbia Friendship Bridge over the Danube in Belgrade. 

For European politicians, the Chinese alternative promises quick results and less fuss over contracts and transparency than typically found in the West. 

The catch is that China’s package deals are government orchestrated and require borrowing from its banks to pay its contractors. 

A few countries, including Montenegro, are taking on large amounts of debt in the process.
Most of the Chinese financial support in Europe is loan-based, helping turn nations into clients of Beijing’s banks. 

And with each achievement, the Chinese companies building infrastructure and selling software or services gain more credibility in the West. 

Stretching its engineering capacity and technological innovation westward helps China expand and modernize its economy, as well as bolster alliances.
Beijing cheered when Greece blocked an EU effort last year to condemn a Chinese crackdown on political activists. 

Politicians in Brussels suggested that Athens had grown too dependent on China because a Chinese government-run company runs Greece’s main port. 

Greece called the proposed measure “unconstructive and selective criticism.”
The push is part of China’s Belt and Road Initiative to develop trade, financial and communication networks around the world—a strategy that came out of the global financial collapse a decade ago, to lessen China’s dependence on a U.S.-led economic order it blamed for the crisis. 

Major infrastructure is the initiative’s calling card.

China Calling
Serbia has welcomed billions of dollars' worth of deals from Chinese companies.

The $255 million China-Serbia Friendship Bridge marked the beginning of major Chinese construction engineering commissions in Europe.

Serbia in 2018 chose Zijin Mining Group Ltd. to invest in its largest copper mining and smelting complex, RTB Bor, in a $1.26 billion deal.

Serbia credits China's Hesteel Group with saving 5,000 jobs with its 2016 takeover of a steelmaker in the city of Smederevo.

Chinese engineers are at work on Serbia's $350 million portion of the Belgrade-Budapest high-speed rail line.

Serbia is emerging as China’s closest partner in middle Europe. 

China designed and built Belgrade’s first new bridge over the Danube River in seven decades, and helped modernize electrical and phone systems in the country. 

Most recently, Serbia got a financial-payments network from government-owned China UnionPay. The platform is Beijing’s answer to Visa and Mastercard, giving Serbians a way to use local credit cards overseas. 

It also gives China’s yuan a route into Europe.
UnionPay says its payment system in Serbia includes chips and other technology standards designed to guarantee “unblocked” international money transfers. 

That, in effect, could weaken a frequent U.S. tool sometimes used against Chinese companies—economic sanctions—by creating a parallel money-transfer system outside U.S. reach.
“For Serbia, it’s important that such a large international player has chosen to cooperate with it,” said Jorgovanka Tabaković, a prominent national politician and governor of the National Bank of Serbia.
As for its influence in Central and Eastern Europe, China points to its investment in the region, noting that it is a fraction of its pan-Europe exposure. 

Beijing committed nearly $8.9 billion in government-backed project loans and other development assistance to all of Europe last year, up from about $4 billion in 2016, according to a Wall Street Journal tally of deals cited in a compendium published by the Export-Import Bank of the United States.
That two-year tally is only 7% of China’s global total of $185 billion in loans and assistance for the period.
U.S. officials have cautioned developing nations that China’s outreach has strings attached. 

In an October speech in Washington, Vice President Mike Pence said of China’s infrastructure loans, “the terms of those loans are opaque at best, and the benefits invariably flow overwhelmingly to Beijing.” 

Defense Secretary Jim Mattis recently raised similar concerns, saying that “massive debt is piled on countries that fiscal analysis would say they are going to have difficulty, at best, repaying in the smaller countries.”
Outside of Europe, China’s $62 billion infrastructure plan in Pakistan is a factor in the country’s debt funk, which helped cost the ruling party a recent election and nudged the country closer to an international bailout. 

In August, Malaysia’s newly elected prime minister, Mahathir Mohamad, ordered a freeze on $22 billion worth of Chinese railway and pipeline construction his predecessor had endorsed, citing inflated contract values and excessive borrowing.
Last year, Sri Lanka surrendered a port to Chinese control to defuse a debt bomb. 

Chinese public works and their big loans are grist for political activists in Angola, Zambia and Kenya.
In Europe, Montenegro faces financial challenges associated with a deal from Export-Import Bank of China and China Road and Bridge Corp. to build its first-ever highway. 

The government calls it the nation’s “greatest engineering construction challenge in its history,” due to the country’s mountainous terrain.
The highway promises to link Central Europe to a port on the Adriatic Sea facing Italy. 

Montenegro already owes around $1.1 billion for the current work, which covers a 25-mile midsection that is due to be completed before mid-2019. 

The cost exceeds the original plans by hundreds of millions of dollars due to unhedged currency swings.
Unless the nation, known for cheap beach holidays, can come up with another $1 billion for a next phase, the four-lane roadway will terminate in a valley of 100 farmers and a general store.

Greece’s Port of Piraeus, pictured on Sept. 15, is managed by Chinese shipping company China Ocean Shipping (Group) Co. 

No data capture the breadth of the economic integration across the region, including private flows from investors who scrambled in after Beijing’s official nod in favor of Europe. 

Some styled themselves as trade middlemen in the continent’s Chinatowns and others formed “friendship” associations to link with local business and academia.
Oil company CEFC China Energy Co. amassed a $1.7 billion empire of property, brewery, soccer, bank and hotel assets in the Czech Republic, but they fell into question earlier this year when the company’s chairman came under investigation by Chinese authorities.
A senior executive at CEFC in Prague said plans were “developing” for China International Trust and Investment Corp. to take over the group’s Europe operations, which would in effect replace a private business with the Chinese state’s oldest-line international investment vehicle.
Beijing has talked about its inroads as a restoration of ancient Silk Road trade routes, but German politician Sigmar Gabriel sees bigger ambitions. 

“It is not a sentimental nod to Marco Polo, but rather stands for an attempt to establish a comprehensive system to shape the world according to China’s interests,” he said when stepping down in February as foreign affairs minister.
Along Europe’s east-west divide, Serbs, Slovaks, Croats and Czechs remain haunted by the Cold War and Yugoslavia’s bloody 1990s breakup. 

Those experiences partly cloud their views of the U.S. and Russia. 

China carries no such historical baggage.
In a near Central European future, a container of Chinese-made mobile phones or automobiles unloading at China Ocean Shipping (Group) Co.’s port in Greece could travel north through Macedonia and Serbia on Chinese toll roads and bridges and slot onto the Chinese-engineered railway to Hungary. 

China-run warehouses have been proposed in Poland, Lithuania and Belarus. 

The item might be purchased on the website of e-commerce company Alibaba Group HoldingLtd., which is expanding its cloud data services in Europe, as the internet traffic moves via the switches installed by Huawei Technologies Co. that dominate the region.
The fast-expanding ties between China and Serbia run from visa-free travel between the two countries to mining, manufacturing and weapons research.

Aleksandar Vučić, then Serbia’s prime minister and now president, meeting Xi Jinping and his wife, Peng Liyuan, last year in Beijing. 

A nation of seven million people with an economy similar in size to Vermont’s, Serbia projects political neutrality. 

Officials have called Beijing a “fourth pillar” of its foreign policy, along with Brussels, Washington and Moscow.
“We do not believe that we should choose between East and West,” Serbian Finance Minister Siniša Mali said in written responses to questions.
Serbian President Aleksandar Vučić describes Xi as a personal friend and has met him five times in two years. 

Their wives discussed bilateral relations in Beijing on Oct 29.
A poll last year by think tank Belgrade Centre for Security Policy found that Serbians see the U.S. as stronger militarily and politically than China but not far ahead of it economically. 

In the poll, the U.S. trails China in technology and in trust as an investor.
The nearly mile-long China-Serbia Friendship Bridge, opened four years ago, was the first major piece of infrastructure constructed in Europe by a Chinese team. 

That led to commissions for its builder, China Road and Bridge, in Croatia and Montenegro.
Even before the bridge’s dedication, according to the term sheet reviewed by the Journal, the clock was ticking on a 18-year requirement for Serbia’s Finance Ministry to wire millions of dollars each January and July to a New York bank account of the Beijing-based project lender, Export-Import Bank of China, until $217.4 million plus fees are repaid. 

The contract also stipulated that “goods, technologies and services… be purchased from China preferentially,” and that any disputes be settled in China.
Work is now under way by China Railway Signal & Communication Co. in Belgrade for a $3 billion rail upgrade to Hungary. 

Construction has been delayed on the Hungarian side because the EU challenged a no-bid award to a Chinese contractor. 

Serbia, unburdened by such rules, fast-tracked approval to the same Chinese contractors for its $350 million portion.
Down the block from Bank of China Ltd.’s new Belgrade office, an 11-floor, $60 million Chinese cultural and corporate center for a government-owned construction business is rising on the former site of China’s embassy. 

The mission was destroyed in 1999 when American planes dropped five laser-guided bombs on it during the North Atlantic Treaty Organization’s campaign to stop the Balkan conflict.
After taking three bows at a plaque to embassy “martyrs,” Beijing tourist Yang Xiaoyu said he was just 2 years old when the bombs fell. 

“I feel like our country was quite weak then,” Yang said. 

“When we came here today and recalled what had happened then, we feel that our motherland is indeed getting stronger.”

China Is Forced to Reconsider Its Route Into Eastern Europe

• 16+1 members disappointed as projects fail to materialize
• Dealing with China ‘like milk production’ in communist times

By Alan Crawford and Peter Martin

China’s efforts to make inroads in eastern Europe are being hindered by what nations see as failed promises on money materializing and the strings attached to investments.
The so-called 16+1 framework was established by China as a means to deepen its footprint in eastern Europe. 

Its members -- 11 European Union countries, from Poland to Hungary and Estonia, plus five Balkan states -- saw the annual forum as a means to attract Chinese investment in infrastructure like roads and rail networks to boost their economies.

China’s involvement with eastern Europe

But many of those states are disenchanted with the lack of investment from China, according to people with direct knowledge of the forum. 

Members are also unhappy at Beijing’s preference to provide loans rather than cash, and now recognize that better deals are available within the EU framework, such as via the European Bank for Reconstruction and Development, the bloc’s development bank.
Some of those projects that have materialized with Chinese help have attracted unwelcome attention. Mounting costs for a highway development in Montenegro prompted the Washington-based Center for Global Development to single out the country as “at particular risk of debt distress,” while the tender for an as-yet unfinished high-speed rail link between Budapest and Belgrade prompted an EU commission probe.

Growing Unease
“Some feeling of unease about the whole scheme has been brewing for some time,” said Jan Weidenfeld, head of European affairs for the Mercator Institute for China Studies in Berlin. 

The conditions attached to projects are seen by 16+1 members as similar to those offered to African states, meaning that some countries “even feel insulted,” he said. 

“The package just isn’t quite as attractive as China would make believe it is.”
Trade and investment links between China and central and eastern Europe have improved over the past decade, yet growth “has not hit declared values and did not meet the expectations” of some countries, Erste Group noted in a report in May. 

Li Keqiang will have an opportunity to raise the matter when he meets European leaders in Brussels on Friday during an EU-Asia summit.
The 16+1 has been controversial from its inception in 2012. 

Armed with its own secretariat staffed by Chinese diplomats, the forum features an annual summit of member state leaders, offering them the chance of bilateral talks with the Chinese premier. 

The focus is on projects that fall under the umbrella of China’s vast Belt and Road infrastructure initiative.
From the outset, EU officials were concerned that it was an attempt by China to split off the bloc’s poorer east rather than deal with Brussels. 

A December 2017 report on EU-China ties by the European Council on Foreign Relations concluded there was “no doubt that the 16+1 is part of a broad ‘divide and rule’ practice.”

Skipping Sofia
The troubles surrounding the forum may be welcomed by Brussels as well as by core member states such as Germany and France, which have been at the forefront of efforts to tighten up screening of Chinese investments in critical infrastructure and companies in the bloc. 

Germany in particular has been increasingly vocal in its criticism of the 16+1.
Germany is fine with countries in eastern Europe pursuing closer economic ties with Beijing, but not at the cost of undermining joint EU policy on China, according to a senior government official in Berlin. 

There’s an implied risk that Chinese investment assumes political favors in return, the official added.
Li is due in Brussels along with some 50 fellow leaders including German Chancellor Angela Merkel, French President Emmanuel Macron and Polish Prime Minister Mateusz Morawiecki, who leads the largest European nation in the 16+1.
Yet Morawiecki skipped this year’s 16+1 summit in the Bulgarian capital Sofia and sent his deputy instead. 

Among the eastern framework’s members, Poland has been key in leading skepticism, two of the people familiar with the deliberations said. 

Hungary under EU-baiting Prime Minister Viktor Orban remains doggedly stuck to China, the people said.

Polish Mismatch
“There was a mismatch of expectations,” said Piotr Buras, head of the Warsaw bureau of the European Council on Foreign Relations. 

Poland wanted Chinese direct investment and involvement in greenfield projects, whereas the Chinese were more interested in public contracts for infrastructure, preferential terms and purchases of high-tech companies.
He also cited a conflict among some east Europeans at being seen to choose China as a strategic partner over the U.S. 

Poland, said Buras, “has chosen the U.S. and it’s tough for them to go into bed with both.”
Inefficiency and needless state interference are among other complaints expressed by forum members. 

The central bureaucracy means it’s often easier to deal directly with Chinese provincial governments than with Beijing, said one official from an eastern EU government.
“It’s like stories my grandfather told me about milk production” in communist times, the official said, asking not to be named discussing the forum since it remains politically sensitive. 

The upshot is a lot of effort with little to show for it, the official said.

China still feels that former Soviet bloc countries in eastern Europe are closer to them, but those diplomatic ties often don’t translate to today, according to an official from another European government.
For all the disappointment, the 16+1 is unlikely to be scrapped, the official said. 

Countries still see value in the guarantee of an annual audience with the Chinese premier, and find that the 16+1 raises their profile in China’s investment-rich provinces. 

That’s an especially important benefit for the forum’s smallest nations, the official said.

Who is at risk from China’s Belt and Road Initiative debt trap?

China’s Belt and Road Initiative (BRI) is raising the risk of a sovereign debt default among small and poor countries
By Nikita Kwatra

China BRI will potentially span 68 countries and could have implications for each of these countries’ public debt.

Mumbai -- China’s Belt and Road Initiative (BRI) which seeks to invest about $8 trillion in infrastructure projects across Asia, Europe and Africa, has come under intense scrutiny, not least due to suspicions over China’s intent behind the ambitious project. 

A study by the Centre for Global Development, a Washington-based think tank, analyses one important consequence of BRI: debt.
While the study finds that it is unlikely that the BRI will be plagued with wide-scale debt sustainability problems, it is likely to raise the risk of a sovereign debt default among relatively small and poor countries.
The BRI will potentially span 68 countries and could have implications for each of these countries’ public debt. 

To understand these effects, the study first uses sovereign credit risk ratings and World Bank debt sustainability analysis to identify 23 of the 68 countries currently at risk of debt distress. 

For these 23 countries, the study adds the Belt and Road Initiative lending pipeline into the countries’ overall debt and debt to China as of end of 2016.
They find that eight countries could face difficulties in servicing their debt because of the Belt and Road Initiative. 

These include Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan. 

Pakistan, which through the China-Pakistan Economic Corridor, serves as the centrepiece of the BRI and is by far the largest country exposed, with China reportedly financing about 80% of its estimated $62 billion debt. 

According to the think-tank, China’s case-by-case approach in dealing with debt relief in the past could prove “problematic”.
One example is China’s acquisition of Sri Lanka’s Hambantota port after the Sri Lankan government failed to service its debt.
Unlike most of the world’s other major creditors, China is not bound to a set of rules on how it addresses debtor repayment problems. 

Currently, China is only an ad hoc participant of the Paris Club, a collection of creditor nations which follow a set of rules in dealing with debtor nations. 

The think-tank advocates applying globally-accepted creditor disciplines and standards to the Belt and Road Initiative.
To do this, they recommend the World Bank and other multilateral banks work with the Chinese government to set the lending standards for the BRI projects.
Another recommendation is to establish a new creditor’s group which would maintain the core principles of the Paris Club.
To mitigate lending risks, China is also recommended to provide technical and legal support to developing countries. 

Finally, the think tank proposes that China should offer debt swap arrangements in support of environmental goals where borrowing country debt is forgiven in exchange for a commitment to an environmental objective, for instance, forest preservation.

China's debt traps

China's Silk Road project runs into debt jam
By Julien Girault
China's dictator Xi Jinping says trade with Belt and Road countries has exceeded $5 trillion

China's massive and expanding "Belt and Road" trade infrastructure project is running into speed bumps as some countries begin to grumble about being buried under Chinese debt.
First announced in 2013 by Xi Jinping, the initiative also known as the "new Silk Road" envisions the construction of railways, roads and ports across the globe, with Beijing providing billions of dollars in loans to many countries.
Five years on, Xi has found himself defending his treasured idea as concerns grow that China is setting up debt traps in countries which lack the means to pay back the Asian giant.
"It is not a China club," Xi said in a speech on Monday to mark the project's anniversary, describing Belt and Road as an "open and inclusive" project.
Xi said China's trade with Belt and Road countries had exceeded $5 trillion, with outward direct investment surpassing $60 billion.
But some are starting to wonder if it is worth the cost.
During a visit to Beijing in August, Malaysia's Prime Minister Mahathir Mohamad said his country would shelve three China-backed projects, including a $20 billion railway.
The party of Pakistan's new prime minister, Imran Khan, has vowed more transparency amid fears about the country's ability to repay Chinese loans related to the multi-billion-dollar China-Pakistan Economic Corridor.
China's "new Silk Road" envisions the construction of railways, roads and ports across the globe

Meanwhile the exiled leader of the opposition in the Maldives, Mohamed Nasheed, has said China's actions in the Indian Ocean archipelago amounted to a "land grab" and "colonialism", with 80 percent of its debt held by Beijing.
Sri Lanka has already paid a heavy price for being highly indebted to China.
Last year, the island nation had to grant a 99-year lease on a strategic port to Beijing over its inability to repay loans for the $1.4-billion project.

Ambiguous partner
"China does not have a very competent international bureaucracy in foreign aid, in expansion of soft power," Anne Stevenson-Yang, co-founder and research director at J Capital Research, told AFP.
"So not surprisingly they're not very good at it, and it brought up political issues like Malaysia that nobody anticipated," she said.
"As the RMB (yuan) becomes weaker, and China is perceived internationally as a more ambiguous partner, it's more likely that the countries will take a more jaundiced eye on these projects."
The huge endeavour brings much-needed infrastructure improvements to developing countries, while giving China destinations to unload its industrial overcapacity and facilities to stock up on raw materials.
Chinese dictator Xi Jinping (C) says the initiative is 'not a China club'

But a study by the Center for Global Development, a US think-tank, found serious concerns about the sustainability of the sovereign debt in eight countries receiving Silk Road funds.
Those were Pakistan, Djibouti, Maldives, Mongolia, Laos, Montenegro, Tajikistan and Kyrgyzstan.
The cost of a China-Laos railway project—$6.7 billion—represents almost half of the Southeast Asian country's GDP, according to the study.
In Djibouti, the IMF has warned that the Horn of Africa country faces a "high risk of debt distress" as its public debt jumped from 50 percent of GDP in 2014 to 85 percent in 2016.
Africa has long embraced Chinese investment, helping make Beijing the continent's largest trading partner for the past decade.
On Monday, a number of African leaders will gather in Beijing for a summit focused on economic ties which will include talks on the "Belt and Road" programme.

'Not a free lunch'
China bristles at criticism.
Sri Lanka has already paid a heavy price for being highly indebted to China

At a daily press briefing on Friday, foreign ministry spokeswoman Hua Chunying denied that Beijing was saddling its partners with onerous debt, saying that its loans to Sri Lanka and Pakistan were only a small part of those countries' overall foreign debt.
Stevenson-Yang said China's loans are quoted in dollar terms, "but in reality they're lending in terms of tractors, shipments of coal, engineering services and things like that, and they ask for repayment in hard currency."
Standard & Poor's said Beijing structures the infrastructure projects as long-term concessions, with a Chinese firm operating the facility for a period of 20 to 30 years while splitting the proceeds with the local counterpart or government.
The head of the International Monetary Fund, Christine Lagarde, raised concerns about potential debt problems in April and advocated greater transparency.
"It's not a free lunch, it's something where everybody chips in," she said.

China's Debt Traps

Chinese 'highway to nowhere' haunts haunts Montenegro

By Noah Barkin, Aleksandar Vasovic

A worker hides from the sun on the Bar-Boljare highway construction site in Klopot, Montenegro June 11, 2018. 

PODGORICA -- Perched atop massive cement pillars that tower above Montenegro’s picturesque Moraca river canyon, scores of Chinese workers are building a state-of-the-art highway through some of the roughest terrain in southern Europe.
The government has described the 165 km (103 mile) highway, with its imposing bridges and deep-cut tunnels, as the construction of the century and a pathway to the modern world.
It is designed to link the port of Bar on Montenegro’s Adriatic coast to landlocked neighbor Serbia. But once the first, challenging 41 km stretch through mountains north of the capital is completed, the government faces a difficult choice.
A Chinese loan for the first phase has sent Montenegro’s debt soaring and forced the government to raise taxes, partially freeze public sector wages and end a benefit for mothers to get its finances in order.
Despite those measures, Montenegro’s debt is expected to approach 80 percent of gross domestic product (GDP) this year and the International Monetary Fund says the country cannot afford to take on any more debt to finish its ambitious project.
“There is a big question about how they complete it,” said an EU official who requested anonymity. “Their fiscal space has shrunk enormously. They have strangled themselves. And for the time being this is a highway to nowhere.”
The road is at the heart of an intense debate about Chinese influence in Europe, both within EU member states and countries aspiring to join the bloc such as Montenegro and its Western Balkan neighbors Serbia, Macedonia and Albania.
As Beijing extends its economic reach under the ambitious Belt and Road Initiative (BRI), poor countries across Asia and Africa have seized on attractive Chinese loans and the promise of transformative infrastructure projects.
This has allowed them to develop in ways that may not have been possible without access to China’s vast foreign exchange reserves. 

But some countries, such as Sri Lanka, Djibouti and Mongolia, have found themselves weighed down by debt and ever more reliant on Beijing’s largesse.
Montenegro is the first country in Europe to find itself in this position as its government presses on with its dream of a gleaming new highway to lead the nation to a brighter future.
“This highway is a big deal in Montenegro. It reminds people of Tito and the days of grand socialist projects in the region,” said academic Mladen Grgic, referring to former Yugoslavia’s long-time communist leader Josip Broz Tito.

“But it’s a trap. Now that it’s been started, the politicians can’t stop it – no matter how harmful it might be. And frankly they don’t want to,” said Grgic, author of a 2017 study on the highway.

‘NOT BANKABLE’
The idea of building a highway from the coast to Serbia can be traced back to 2005, a year before Montenegro’s vote for independence from its neighbor. 

The project was championed by Milo Djukanovic, who has served as president or prime minister of Montenegro nearly uninterrupted since 1991.
The government hopes the highway will give an economic boost to the country’s underdeveloped north, bolster trade with Serbia and improve road safety as Montenegro’s narrow, winding mountain roads are notoriously dangerous.
Having recognized that there is little scope to take on more debt, the government’s options for building the next three phases of the highway are limited.
The option it now favors is a public private partnership (PPP) in which an outside partner would build and operate the highway, then run it under a concession from the state for 30 years to get a return on their investment.
China Road and Bridge Corporation (CRBC), the large state-owned Chinese company that is building the first section, signed a memorandum of understanding (MOU) in March to complete the rest of the road on a PPP basis.
But European lenders worry that Montenegro would need to offer costly revenue guarantees to make that work, potentially deepening its financial woes.
“We told them that their PPP model was not bankable, that they would be taking on risks they don’t know how to manage,” said an official from the European Investment Bank (EIB), the European Union’s lender.

A bridge construction site of the Bar-Boljare highway is seen in Bioce, Montenegro June 07, 2018. 

The IMF cautioned the government in May against a PPP solution that could introduce large contingent liabilities. 

One official suggested Montenegro would be better off waiting until it joined the EU before finishing the highway.
Once it is part of the EU, Montenegro would have access to more structural and cohesion funds from Brussels. 

But the process of joining the bloc could take a decade or more, despite a loose target date of 2025 floated by the EU this year.

FEASIBILITY STUDIES
Doubts about the highway surfaced after two feasibility studies, conducted in 2006 and 2012, showed it was not economically viable.
Reuters reviewed copies of the studies, the first carried out by French firm Louis Berger for the Montenegrin government, and the second by U.S. company URS for the EIB. 

Both concluded there would not be enough traffic to justify a concession.
Louis Berger estimated the government would have to pay 35 million to 77 million euros a year in subsidies to make a toll-based system attractive to outside investors.
URS looked at each section of the highway and concluded that all possible combinations were economically unworkable. 

It recommended a more modest upgrade of existing roads.
“The low current traffic volumes and the weak economic forecasts mean that the economic benefits of the proposed route do not provide adequate return on the investment,” URS said.
To justify the grand highway envisioned by the Montenegrin government, URS said internal rates of return of 8 percent would be required but it estimated they would be below 2 percent.
Ivan Kekovic, an engineer who was involved in the project in its early years but later issued an open letter to parliament warning against it, told Reuters that average traffic of 22,000 to 25,000 vehicles a day would be needed to justify a highway of the proposed scale.
Daily traffic on the busiest stretch, from the capital Podgorica to the port of Bar, is less than 6,000 vehicles.
Early attempts to build the highway, first with a Croatian consortium and then with a Greek-Israeli one, collapsed after both groups failed to provide bank guarantees in time.
Critics breathed a sigh of relief, convinced the project was dead. 

Then China appeared on the scene.

CHINA FILLS VOID
Economics professors at the University of Montenegro were paid by the state-funded Export-Import Bank of China to conduct a new feasibility study.
This one found the highway was viable, according to the government. 

But this study has never been made public and attempts by Reuters to see it were unsuccessful.
China Communications Construction Co., CRBC’s parent firm, did not respond to a request for comment about the studies.
MANS, an EU-financed anti-corruption watchdog, pressed the government to provide members of parliament with data to support its vision before a vote to approve the highway in 2014. 

It refused.
“We have no doubt that the data that the ministry of transport used in order to justify the construction of the highway are fabricated,” said Dejan Milovac, deputy executive director at MANS.
The government denies manipulating the numbers and says the highway will deliver long-term economic and social benefits that prove the skeptics wrong.
Zorana Mihajlovic, deputy prime minister of Serbia, which is building a stretch of highway with Chinese help to link with the Montenegrin road, took a similar view.
“There are investments that may not be economically justifiable from a short-term perspective, but which are strategically important,” she told Reuters.
The six Western Balkan countries – Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia - are surrounded by EU member states. 

But the region has suffered from under-investment and poor governance since the independence wars of the 1990s, making it an economic laggard.
Over the past decade, as the EU struggled with a succession of crises and put enlargement of the bloc on hold, other powers, including Russia and Turkey, have moved in to fill the void.
China has been especially active. 

In 2012, it began holding annual “16+1” summits with eastern and southern European states to discuss investment opportunities, infuriating Brussels.
A year later, it unveiled BRI, its grand plan to secure land and maritime trade routes from Asia to Europe and Africa.
The Western Balkans, strategically positioned on Europe’s southern flank, is a key access point for China to reach central Europe and beyond.
China’s investments in the region total more than 6 billion euros -- including highways, rail lines and power plants. 

Serbia, the largest economy in the region and Beijing’s long-standing ally, has received the lion’s share.
Montenegro could be attractive to China for a number of reasons. 

It gives Beijing a port of entry into Europe from the Adriatic, and close economic and political ties with the government in Podgorica could prove valuable for China if Montenegro becomes an EU member.

‘DISBELIEVERS’
The 809 million euros Montenegro received from China’s Export-Import Bank covers 85 percent of the cost of the first section of the road.
The dollar-denominated loan carries a 2 percent interest rate, 20-year repayment schedule and 6-year grace period – attractive terms but a major long-term burden for a country of roughly 620,000 people.
Under the terms of the contract, an arbitration court in China would have jurisdiction in the event of any legal dispute. 

CRBC won commitments that all imported construction materials, equipment and other goods be exempt from customs and value-added tax. 

Chinese workers were given 70 percent of the work.
Some 3,605 workers are busy building the first section of the highway. 

Roughly two-thirds of them are from CRBC, one of the largest engineering and construction firms in the world.
Four camps of neat blue-roofed bungalows house the Chinese workers. 

Dotting the area are billboards in Chinese and English exhorting them to be meticulous and responsible.
“CRBC expects to build the future sections of this project,” Kang Shifei, deputy project manager for CRBC, told Reuters on a blazing hot afternoon in June, beneath the giant pillars that will support a kilometer bridge above the Moraca canyon.
Because the government did not hedge against currency swings and omitted a vital turnpike from its original blueprint, the cost has continued to rise. 

It is now approaching 1 billion euros, nearly a quarter of Montenegro’s GDP.
A March report from the Washington-based Center for Global Development which examined the debt risks associated with BRI listed Montenegro as one of eight highly vulnerable countries, alongside Djibouti, the Maldives, Laos, Mongolia, Tajikistan, Kyrgyzstan and Pakistan.
The remaining three-quarters of the highway will plow through less mountainous terrain. 

The IMF estimates it will cost another $1.2 billion to complete.
Prime Minister Dusko Markovic has said it will be finished at any cost and promised to deepen cooperation with China in other areas, including hydropower and tourism. 

He has dismissed critics as “disbelievers”.
But opposition politicians are worried – about the country’s finances and about China’s role.
Dritan Abazovic, head of the United Reform Action opposition party, said it was normal for an economic power such as China to seek a role in the region, alongside the EU, United States and Russia.
But because of the scale of the project, he worries the deal with the Chinese will end up giving Beijing much more influence over Montenegro.
“It puts the Chinese in a very very comfortable position,” he said.