China and the World

Off the rails

China’s overseas projects in political hot water

Mexico's President Pena Nieto gestures in Mexico City

Pena Nieto readies the bad news

Is China doing its due diligence before investing overseas? That’s the question local academics and newspapers asked this month after at least three Chinese projects in Sri Lanka, Greece and Mexico got into hot water.

The situations in Colombo and Athens — both involving ports – may yet be resolved, with the projects continuing as planned.

But the dispute in Mexico, involving a cancelled high-speed rail project, now has China Railway Construction Corp (CRCC) suing that country’s government for the money it spent bidding for the $3.7 billion contract.

News that CRCC had taken the unusual step of seeking compensation came on Tuesday with the Mexican government confirming it had received a list of the costs the Chinese company had incurred. The actual amount has not been disclosed but a statement by Mexico’s transport ministry says the figure includes hotel bills for CRCC employees, their salaries and money involved in financing the offer.

The CRCC-led consortium first ran into trouble with the contract in November. Two days after the Chinese had won the bid, President Enrique Pena Nieto withdrew the offer amid allegations of corruption.

CRCC was untainted in the scandal, which centred on Pena Nieto’s relationship with one of the Mexican members of the Chinese-led consortium, and the company was encouraged to bid again when the tender was reopened. That was meant to happen in January but instead the Mexican government “suspended” the project indefinitely citing a lack of funds.

The 220km rail line – should it ever be built – will run from Mexico City to the industrial hub of Queretaro, north of the capital. Had CRCC been allowed to build the rail link, it would have been the largest single overseas construction deal won by a Chinese firm.

China sees its high-speed rail technology as one of its most exportable industries and it is working hard to find global clients. A report by the Ministry of Commerce last week showed that Chinese railway companies had tripled their overseas contracts last year, netting a total of $24.7 billion in deals.

It also said China had exported nearly Rmb27 billion ($4.3 billion) of railway equipment in 2014, an increase of 23% over the previous year.

A senior executive with the trainmaker CNR Corp told state media that China was currently negotiating with 28 countries about constructing high-speed rail lines. These include Russia, Laos and Thailand. The same executive told China Daily: “The US will be the next strategic focus for us.”

But given the recent setbacks, many are asking if Chinese firms are in too much of a rush to show they can win overseas contracts.

“The Mexican situation reminds Chinese companies that if they want to invest abroad, they should learn the policies and regulations of other countries to have a clear, general view of their political environment,” wrote the Shanghai-based online newspaper The Paper.

Beijing Business Today added that doing business in democracies such as Greece or Sri Lanka was not the same as working in one-party China.

“China often invests in projects that require long periods and in countries that may go through an election. That demands greater diplomacy from our country. Not only should we maintain good relations with the governing party, but also with the opposition party.”

That’s a point reiterated by an academic paper hosted on the Ministry of Land and Resources website: “China focuses too much on economic risks and not enough on the political risks when doing assessments,” it said. “We overestimate the power of the top-level and overlook the power of civil level including opposition parties, non-governmental organisations and media.”

As news emerged late last month that another Chinese project in Mexico – a massive trade mall in Cancun – had been scrapped for environmental violations, the criticisms ring true.

And with China Telecom reportedly readying a bid to build a broadband network in Mexico, they are lessons that may well be worth heeding.

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