The development and operation of rail infrastructure by Chinese contractors was at the forefront of discussions at the ‘4th International Infrastructure Investment and Construction Forum’ hosted by the Chinese International Contractors Association (CHINCA) in Macau recently. Although both sides are eager to make this arrangement work, they should also be aware of the potential pitfalls this partnership could bring.

Chinese Prime Minister, Li Keqiang, recently said, “For China, Romania is a bridge, as well as Eastern Europe. Cooperation between China and Central and Eastern Europe is an important part of the cooperation between China and the European Union and Romania plays a major role in it”¹.There is evidence that Eastern Europe is looking to take advantage of this Chinese interest. For example, the Romanian and Chinese authorities have announced the launch of talks to develop the EUR 11bn Vienna-Bucharest-Constanta high-speed railway. Romania is not the only potential beneficiary of Chinese investment in the rail sector. Serbia and Hungary are also in dialogue with the Chinese to build a railway linking Belgrade and Budapest.

PPP Structures

Romania has said that it intends to develop its infrastructure using Public Private Partnership structures. PPP structures are probably not the most familiar structure to a Chinese contractor and possibly not its first choice as a means of developing infrastructure. Nevertheless, the approach is flexible and this should not be a particular impediment.

Procurement Rules

Of greater significance will be the fact that many of the countries that would like to benefit from China’s investment should comply with procurement rules intended to open up public procurement to open and transparent competition. If a country wishes to procure works or services then, in order to comply with the rules, it should advertise the opportunity and allow suitably qualified bidders to compete for the right to develop the new infrastructure in accordance with established evaluation criteria. This would not preclude Chinese contractors from bidding but it might be at odds with a private deal between a host government and a Chinese contractor. Of course, if Chinese contractors are able to provide the most competitive offers then this should not be an issue.

Rail Regulations

Over the last decade, the European Union has issued various rail “packages” designed to make the provision and operation of rail systems more uniform and open. The regulations are broad in their reach and cover issues such as safety and interoperability. Significantly from an investor’s point of view, they also cover the right of a third party to access the infrastructure and the levying of charges for access to the infrastructure.

The operator of the infrastructure will not have a free hand in setting the charges and this could be a significant consideration if the infrastructure is to be financed using a project financed PPP structure. Also, a train operator cannot necessarily expect exclusive use of the infrastructure as the regulations give third parties rights to use the infrastructure too.

Rolling Stock

Chinese investors may view Europe as an ideal market for their rolling stock (or other systems) and may want to develop infrastructure to create a market for that rolling stock. Again, the procurement rules may muddy the waters, as a public authority procuring additional rolling stock should run an open and transparent competition for that rolling stock (as it should for the infrastructure).

Despite these issues, it has been reported that Chinese investment in Central and Eastern European has risen from very little at the turn of the century to approximately EUR 600m in 2012 so it will be interesting to see how events unfold.

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