Megaprojects in Europe are complex in their planning and execution. This is even more so the case when Chinese State-Owned Enterprises engage in such projects in Europe. As part of a CHERN (China in Europe Research Network)-funded Rapid Short Term Scientific Missions (R-STSM ), we conducted a cross-case examination of two megaprojects involving the China Roads and Bridges Corporation (CRBC) in the Western Balkans. We will describe the Pelješac bridge megaproject in Croatia, widely considered successful, and the Bar – Boljare highway megaproject project in Montenegro, which has not been considered a success. We identified the CRBC cases through purposeful sampling (Suri, 2011) wherein we investigated two projects of the same firm in two distinctive host markets- the EU and a non-EU country- examining the issues that tend to arise in such projects. Closer examination of these results offers relevant insights for policy makers and decision makers involved in infrastructure projects in Europe. This analysis supports necessary action for the successful completion of these economic and social development projects.
China Roads and Bridges Corporation (CRBC) is one of the leading Chinese companies engaged in the design and construction of roads and road-related infrastructure in the world. It encompasses a formidable portfolio of projects predominantly located in Asia and Africa. CRBC launched its operations in Europe only in the 21st century.
INTRODUCTION TO MEGAPROJECTS
Supported by capital infrastructure investments, so-called megaprojects have drawn public attention particularly regarding assessments of their efficiency – and more recently– of their efficacy. In every environment, the community and market shape the rules, priorities, and legal frameworks regarding the development of such projects. However, everything evolves with time, and so does the management of capital infrastructure projects. Presently, megaprojects of this kind are assessed not only considering if what was built matches the initial engineering blueprint and design (designed VS delivered) but also considering the megaprojects’ impact on all relevant stakeholders.
Features of mega projects
Observing such undertakings from a project lifecycle perspective involves the assessment of a wide range of efficiency- and efficacy-related parameters, not only in the assessment phase but also throughout the lifecycle of the project (where designed VS delivered is placed). These factors parallel the constantly increasing significance of environmental, social, and governance (ESG) parameters in financial institutions’ investment decisions. Moreover, identifying, assuming, acknowledging, and, most importantly, incorporating the needs of the broadest possible number of stakeholders when assessing the feasibility of a capital infrastructure project has become a condicio sine qua non of capital infrastructure projects relying on institutional funding in the European Union. These priorities have been and are continually implemented in the legal frameworks of EU members states’ legislatures.
Characteristics of megaprojects
Lengthy lifecycle – measured in decades
Vast and diversified pool of stakeholders – spanning from public, private, international, academic and others
Immense budget – measured in tens and hundreds of millions of euros
CRBC IN THE WESTERN BALKANS
CRBC’s Bar – Boljare highway (Montenegro)
Montenegro is a charming post-Yugoslav country that is home to 620,000 people. Nested on the Adriatic coast across from Italy, it stretches between Croatia and Bosnia & Herzegovina on the northern coastline, Albania on the southern coastline, and Serbia in the upper northeast. Most of its GDP relies on tourism. Montenegro authorities have long sought a highway in the hopes that it would improve and eventually increase internal and tourist traffic while ensuring safety. Building a highway between the city of Bar on the Adriatic coast and the city of Boljare on the border with Serbia (Figure 1) was seen as a solution. However, a preliminary design was turned down several times by Europe-based financial institutions such as the EBRD and EIB. Montenegro then turned to China, and in early 2014 Montenegro signed a contract with China Roads and Bridges Corporation (CRBC) for the highway’s construction. Credit was to be provided by the Chinese EXIM bank. In December of that year, a Law on Bar – Boljare was accepted by the Montenegro Parliament. The project would cost 944 million US$ and would be completed within 48 months (i.e., by the end of 2018). The negotiations were conducted directly between the Montenegro government and CRBC. It was only then that it was disclosed that according to the contract Montenegro would be exempting CRBC from:
- Contributions for compulsory social insurance for foreigners involved in the project.
- Customs on building materials, equipment, and facilities in relation to the construction of the highway.
- Income and personal income taxes.
- Value-added taxing.
Figure 1: Location of the Bar – Boljare highway
As of this writing in October 2021, the highway is still not completed. According to official information, delays have been incurred by “unforeseen works,” among other factors, and cost overruns have accumulated to over 50% of the projected total so far (research conducted through CHERN). In the meantime, government officials and stakeholders have diverged in their views of the issue. According to Montenegro’s president, the project is one of the most important in Montenegro’s modern history. In contrast, environmental activists’ and others’ complaints and criticisms have mounted considerably in relation to environmental damages caused by the project. Among scholars and researchers of capital infrastructure investments and megaprojects, the Bar – Boljare highway project has become associated with the inefficiency of Chinese construction companies in managing such projects as well as with the inability of Montenegro officials to handle an investment of this type.
CRBC’s Pelješac bridge in Croatia
Located on the Adriatic coast, Croatia joined the EU in 2013 and has a population of approximately 4 million people. The Croatian Pelješac bridge project is among the first projects in which CRBC was engaged in the European Union. The Pelješac bridge (Figure 2) is a 2.4 km cable-stayed bridge over the Mali Ston Bay of the Adriatic Sea. It connects the Croatian mainland and the Pelješac Peninsula of its southernmost Dubrovnik-Neretva County, bypassing a short strip of Bosnia and Herzegovina’s territory.
Figure 2: Location of the Pelješac bridge
In the first week of June 2017, the European Commission approved 357 million EUR (MEUR) of financial support to Croatia for the construction of the Pelješac bridge. It was argued that the bridge would significantly improve the everyday life of Croatians by reducing travel time between Dubrovnik and Split. The construction of the bridge would considerably support the development of tourism and trade, reinforce the territorial cohesion of the South Dalmatia region with the rest of the country, and facilitate a smooth flow of goods and people around the country, especially at the peak of the tourist season. The contractor was selected through an open bid process and the China Roads and Bridges Corporation was chosen for the project in early 2018. The completion time was set for 36 months. The bridge has been completed, with the final steel box girder lifted and welded to the main structure of the bridge in the last days of July 2021.
COMPARISON OF PROBLEMS ENCOUNTERED BY CRBC
There are no perfect development solutions and there is no project – let alone a megaproject – that does not encounter obstacles, slippages, overruns, external risks, deviations, or other internal or external influences affecting its overall efficiency and success. However, practitioners and scholars are aware of these realities. Hence, they are constantly trying to improve the existing situation – a process that often involves learning from mistakes. From this perspective, both projects encountered some slowdowns, problems, and unplanned incidents. Yet the one in Croatia is completed and the one in Montenegro is not. In the paragraphs that follow, we examine the conditions that allowed success and then failure in these two CRBC projects.
The project was subject to bidding on an open international tender. Funding (85%) was provided through the European Investment Bank (EIB); hence, anyone who wanted to bid for the project had to comply with the rules and policies of EIB. There were three bidders:
- Strabag from Austria, bidding with 2.6 billion HRK (350 MEUR);
- A consortium of Italy’s Astaldi and Turkey’s IC Ictas, bidding with 2.5 billion HRK (332.7 MEUR);
- A consortium led by China Roads and Bridges Corporation, including CCCC Highway Consultants Co. Ltd., CCCC Second Highway Engineering Co. Ltd., and CCCC Second Harbour Engineering Co. Ltd., bidding with 2.08 billion HRK (276 MEUR).
Strabag objected to the results of the tender, claiming that the Chinese consortium provided an unrealistically low (dumping) price for the project. Strabag officials subsequently filed a complaint against the decision as well as a motion for a temporary stay of construction in the Administrative Court in the Croatian capital of Zagreb. They also turned to the European Commission for legal protection. However, the charges were dropped and the project subsequently proceeded as planned. The Chinese ambassador and CRBC emphasized the importance of a Chinese company being awarded such a project by a European financial body. The bridge was completed three months ahead of schedule despite being completed during the Covid-19 pandemic.
Bar – Boljare highway
The agreement to hire CRBC was made bilaterally between the state and the corporation. There was no open call tender for companies to compete, and the contract between the Montenegro Government and CRBC was not made transparent to the public to the extent common with similar projects financed by European financial institutions (i.e. EIB). The causes of unforeseen delays and cost overruns were identified as they arose by the management of both contracting parties. These causes included:
- The contract being signed in US$ instead of EUR;
- Contractors not being issued necessary permits/licenses in due time by local authorities;
- The omission of certain sections of the highway from the initial design (i.e., the dispute over the Smokovac loop).
The project has led to an eruption of complaints and protests from various environmental stakeholders blaming CRBC for not adhering to the agreed-upon legal framework related to environmental protection and impact. Our R-STSM team at CHERN concluded that the main reasons for the cost and schedule overruns can be traced back to negotiations in the early stages of the project. Definitions of and agreements on project management rules reached in a project’s early stages can subsequently affect issues such as supervision, quality assurance and quality control (QA/QC) policies, thus impacting cost and schedule overruns. Our team also concluded that cost overruns are mainly attributable to the contract agreement being in US dollars, wherein ongoing currency inflation drives inflation in budgeting. This was an external and thus uncontrollable risk; however, it could have been avoided had the parties agreed to a different currency. Schedule overruns were caused by Chinese contractors’ lack of knowledge and preparedness around environmental, urban, and spatial planning policies as well as local procedures and legislation. Covid-19 also impacted schedules, but only to the extent that it also impacted the Pelješac bridge. The Bar – Boljare highway is still under construction.
Lessons learned from Chinese Megaprojects in Europe
Globalization followed by the financial crisis of 2007/2009 has spurred international – in this case intercontinental – business communities to cooperate in the development of capital infrastructure investment projects. Having achieved a remarkable track record building highways in Africa, China showed interest in entering Europe and positioning itself as one of the key stakeholders in the road building market. How, then, do we end up in a situation in which one globally-recognized and well-respected company manages to successfully complete a megaproject in one location while at the same time failing in a similar project just 200 kilometres away? These two cases show us that simply replicating business models might lead to peril. More importantly, they show us that rules are there to be followed. And rules are set by the investors. These two cases clearly show the difference between a situation in which the rules are clear and one in which they are not.
Concrete, steel, welding, designing, building, and all other engineering miracles aside, the true trophy CRBC takes from the Pelješac bridge is that it managed to comply with the EIB, hence EU, ways of doing business. So why didn’t their team in Montenegro do the same thing? We are presently witnessing a significant gap in knowledge and understanding of markets, communities, and environments from companies and corporations that come a long way to develop their business in those markets, communities and environments. Supporting banks are first to learn the differences, as they are the ones who set the rules – be it in US$ or EUR. Banks and related financial institutions – in this case, Chinese ones – are the first in line to see the discrepancies in cost overruns compared to planned costs, and therefore should be raising this issue and prioritize it among their management boards and trustees. Chinese companies would themselves benefit from strengthening their knowledge and experience base. For example, a CRBC project manager working on the Pelješac bridge is uniquely positioned to teach his colleague who worked – and is still working – on the Bar – Boljare highway. Accordingly, there is a lot one investment officer from a supporting EXIM Bank in China could learn from his peer colleague in EIB on how to ensure that projects do not face considerable cost and schedule overruns. To that end, the CHERN team will continue its analysis and contributions on this topic, generating and sharing knowledge on successful project management related to capital infrastructure projects developed under the Belt and Road Initiative.
This comparison of CRBC projects in Montenegro and Croatia has several implications for neo-institutional theory focusing on how institutions relate to organizations, especially regarding the ways that the latter legitimize their activities by complying with the values and regulatory and social norms of institutional systems (DiMaggio & Powell, 1983; Haunschild & Miner, 1997; Powell & DiMaggio, 2012). According to neo-institutional theory, a major factor in MNCs’ internationalization strategies is gaining legitimacy in their operational milieux (Xu & Shenkar, 2002), with legitimacy defined as the “generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions” (Suchman, 1995). Legitimacy is connected to the concept of isomorphism (DiMaggio & Powell, 1983) which refers to the “propensity of organizations to become structurally similar to one another over time” (Tolbert & Darabi, 2019) and the conformity that organizations demonstrate with mimetic isomorphism (imitation of practices of other organizations), coercive isomorphism (pressures from other organizations) and normative isomorphism (influence from professions) (Björkman, Fey, & Park, 2007; Kostova & Zaheer, 1999). We argue that achieving legitimacy, i.e. legitimation, in institutionally-distant markets requires deciphering and responding to isomorphic pressures. Looking at two very different host markets – Montenegro and Croatia – we see how CRBC was subject to different isomorphic pressures in these divergent environments. In contrast to extant literature showing that Chinese firms can more easily internationalize to less advanced markets, our study reveals that in advanced markets, as in the case of Croatia, the foreign firm encounters stronger regulatory pressures, which in turn lead to compliance and successful completion of the project. However, Montenegro, being less advanced, exerted weaker regulatory and normative pressures, and CRBC failed to deliver the project.
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ABOUT THE AUTHORS
Miljan Radunović is a PhD candidate at Singidunum University in Belgrade, Serbia. His research focuses on overcoming the roots of inefficiency of capital infrastructure investments developed under the Belt and Road Initiative in south-eastern and central eastern Europe (SEE/CEE) by using modern project management tools throughout the whole project lifecycle. Previously, he has worked as a project manager on capital infrastructure investments projects in the SEE/CEE region, mainly through PPP (public private partnership) models. Currently, he is a project manager at CIVITTA, responsible for the implementation of the Horizon 2020 funded project EU-India Innovation Center. He holds B.Sc. in mechanical and M.Sc. in industrial engineering from the School of Mechanical Engineering at the University of Belgrade.
Dr. Güldem Karamustafa is a senior researcher at HEIG-VD, within HES-SO. Her research focuses on processes of learning and adaptation to provide insights into how managers and firms can effectively deal with constant change and learn through diverse experience. She studies organizational learning, internationalization, M&As, and sustainability.
Prof. Anna Lupina-Wegener is a Full Professor at HEIG-VD, within HES-SO, and Head of the Intercultural Management Centre. She investigates internationalisation processes, cross-border mergers and acquisitions, and virtual teams, referring to social identity and neoinstitutional theories.