WSJ : The A2 highway between Warsaw and Berlin

(this article appeared on WSJ on June 3, 2012)

SKIERNIEWICE, Poland—Chinese companies have wowed the world with superhighways, high-speed trains and snazzy airports, all built seemingly overnight. Yet a modest highway through Polish potato fields proved to be too much for one of China's biggest builders.

The A2 highway between Warsaw and Berlin was supposed to be an opportunity for Chinese construction to shine on a European stage after years of megaprojects at home and in the developing world. Poland badly wanted the project completed before the European soccer championships starting June 8, which Poland is hosting for the first time with Ukraine.

Instead, a key 30-mile stretch of the road fell victim to poor planning, strict regulations, higher-than-expected costs and—in small part, frogs.

It remains unfinished nearly three years after contracts were awarded to Chinese builders. The Polish government is warning there will be detours around the highway's "Chinese sections" when the soccer championships begin.

"The Chinese company in my opinion was not well prepared to handle a contract," says Leszek Szczepaniak, an engineer in charge of monitoring the highway construction for Poland's government.

Chinese officials and the primary project contractor, Beijing-based China Overseas Engineering Group Co., also known as Covec, didn't respond to requests for comment. "We are still dealing with the relevant issues regarding this project. It is not convenient to accept any interviews at this stage," said a statement from one of Covec's partners,Shanghai Construction (Group) General Co.

The project raises questions about Beijing's strategy of pitching state-directed construction firms as the low-cost solution to the world's infrastructure needs. Premier Wen Jiabao recently cited the "mutual benefit" of a Chinese role in U.S. infrastructure construction. In Warsaw in April, Mr. Wen announced a $10 billion credit line to fund infrastructure, technology and energy projects in Central and Eastern Europe.

A Chinese company is supplying replacement spans for the San Francisco-Oakland Bay Bridge, and another has a joint venture with an American partner that is refurbishing New York City's Alexander Hamilton Bridge for $407 million.

When Chinese construction firms work at home or in Africa, the jobs are often monumental but subject to little regulatory oversight. In the two U.S. bridge projects, meanwhile, Chinese builders worked with U.S. partners and had more limited roles.

For the Polish highway, by contrast, Covec was hired to manage a complex project from beginning to end in a European Union nation, including design, financing and construction within tight regulatory confines. It failed.

Lech Witecki, Poland's general director for National Roads and Motorways, said Covec was ignorant of legal requirements for the structure, and wanted an additional $320 million to resume work on the highway

Covec was thin on management expertise, lacked financial skills and didn't understand the importance of regulations and record-keeping in public works projects in the West, according to numerous people involved in the project. Says Marek Frydrych, a Chinese-speaking adviser to Covec: "They thought they came to Africa."

China's expressway system is now second only in length to the U.S. Interstate Highway System, and a focus on building infrastructure in the developing world has made its engineering companies among the busiest anywhere.

The engineers used by Covec, an international arm of government-owned China Railway Group Ltd., are credited with ambitious projects ranging from Shanghai's tallest building to a dam in Congo.

Poland was considered a gateway to the West. As one of the fastest-growing members of the European Union, it is seeking to modernize its neglected infrastructure and has a drawing board full of projects, including railways, power plants and $20 billion in new roads. After extensive work in Africa, Covec entered Europe about five years ago with an office located in a beige house on Warsaw's suburban Transportation Workers Street.

Business came slowly in Poland. After unsuccessful bids to build a subway and two stadiums, the primary contract Covec scored was a six-story hotel.

That changed in 2009, when Poland's road agency sought bids to modernize the motorway between Warsaw and Berlin.

A new 56-mile highway, between Warsaw and the Polish city of Lodz, was designed to replace the existing route, a patchwork of two-lane roads through flat potato fields where tractor trailers jostle with farm equipment.

Along with three partners, Covec in September 2009 won the right to build 30 miles of the road for $450 million, about half the Polish government's cost estimate.

The European companies that lost filed a formal protest, saying Covec couldn't profitably build what it promised for what it bid. The Chinese company successfully fought off the challenge by submitting resumes of its engineers to prove their competence and by claiming it had access to $100 million in cash, which would reduce financing costs, according to official documents.

In addition to Covec, all its partners in the deal—two state-run Chinese behemoths, Shanghai Construction and China Railway Tunnel Group Co., as well as small Warsaw firm Decoma Ltd.—declined to comment.

During the design and preparation stages in 2010, Covec met its targets and demonstrated technical acumen, according to Mr. Szczepaniak, a 50-year-old engineer for a Dutch company called DHV, which was employed to audit overall progress on the A2.

Organizing actual construction proved harder. To manage the project, Covec brought in Fu Tengxuan, a 49-year-old railway engineer, who spoke only Chinese and appeared to have little authority, telling colleagues that headquarters in Beijing needed to approve even the purchase of an office copier.

"I can't say any bad words about him, only that he couldn't take decisions," says Robert Piatek, Covec's most senior locally hired engineer, who left the company around the end of 2010. Mr. Fu, who returned to China in late 2010, couldn't be reached.

Into the autumn of 2010, Mr. Szczepaniak says he grew uneasy as Mr. Fu failed to propose suppliers and subcontractors, as the contract required, or take action to import Chinese workers and equipment.

Covec officials appeared to have overlooked some crucial requirements for the project, according to Polish regulators, including 3-foot-tall passageways beneath highways to allow frogs and other small animals to cross the road's path safely. These tunnels are standard in Europe, but during a 2010 site visit, Covec's top executives, accompanied by the Chinese ambassador, seemed astonished to learn of the legal requirements.

It was evident, says Lech Witecki, Poland's general director for National Roads and Motorways, or GDDKiA, that "someone didn't consider this documentation."

Frog tunnels weren't the only details Covec apparently missed while considering the project. It initially lacked a written budget, said Mr. Piatek. "This project was wrongly calculated at the beginning," he said.

In Poland, everyone involved appeared to be counting on the Chinese government as a guarantor the highway project would succeed.

Boguslaw Liberadzki, a former Polish infrastructure minister who sits in the European Parliament, says any doubts about whether the Chinese could finish the job were dismissed. The prevailing view was: "China's government is a rich government. They want to enter the EU market. They will cover the losses," Mr. Liberadzki said in a recent interview.

Although the funding of Chinese projects in other areas such as Africa and Asia is often murky, analysts say that Beijing regularly foots the bill. The companies often face little local oversight and can ship in all equipment, materials and workers they need. When problems arise, the Chinese embassy works out solutions with the local government.

As he prepared the project, Mr. Fu struggled to get suppliers to agree to his terms. He often told salesmen they were lucky to deal with such a big Chinese company and then requested 20% and 40% discounts, says his translator Artur Krystek. "He had no idea how to work on this project," Mr. Krystek says.

Mr. Piatek, Covec's senior local engineer then, says that as problems were brought to their attention, Chinese engineers suggested government officials would work them out. "They didn't listen. They said, 'someone from China will come and fix everything,' " Mr. Piatek recalled.

One of Mr. Fu's difficulties was to hire subcontractors willing to accept a low fee for the highway's 61 overpasses. When Mr. Fu assembled a team in November 2010, Mr. Szczepaniak vetoed the choice as too inexperienced.

Days later, Mr. Fu returned to China, according to numerous people familiar with the matter. And Mr. Piatek quit.

Now in charge was Sun Hang, a 47-year-old engineer for Covec's consortium partner China Railway Tunnel with experience from Dubai and Hong Kong.

Mr. Sun had more liberty to spend and work picked up. Soon, around 200 Chinese laborers were on site, graders leveled earth and a service road got paved. "It was still possible to finish the construction on time," Mr. Szczepaniak says he thought.

But when Mr. Szczepaniak sought assurance around the beginning of 2011 that the Chinese team was prepared for plunging temperatures, he says, Covec dispatched receipts for jackets and other heavy clothing instead of the plans for winterizing heavy equipment that he sought. Mr. Sun didn't respond to requests for comment.

When Lunar New Year came in February, Covec treated Polish workers to a celebration at a local Chinese restaurant where toasts were made with shot glasses featuring Mao Zedong's face at the base.

By springtime, Covec appeared to be suffering a cash crunch, according to GDDKiA. Normally the company would get paid 30 days after inspectors certified a particular job. But GDDKiA says Mr. Sun was asking to get money more quickly. Inspectors cited poor record-keeping and construction mistakes, including shortcomings in the way workers set steel reinforcement bars in concrete as reason for delaying payment.

Other times workmanship looked impressive, Mr. Szczepaniak said, but payments got delayed because "documentation wasn't good enough to prove it."

After a holiday break in early May, many Chinese workers didn't return and machines stopped.

Summoned by Mr. Szczepaniak, Covec's Mr. Sun explained his money was gone. Covec had done much of the earth-moving work but had paved little more than a service-access road.

Over the next several weeks, bills piled up at Covec. Subcontractors set tires on fire to protest nonpayment. That prompted Covec's president, Fang Yuanming, to fly from Beijing with a plan to settle claims by late May, restart construction and respect contract terms.

But construction didn't resume. By early June, the disruption had grabbed the attention of Poland's prime minister, Donald Tusk, who met with Covec officers and China's ambassador, Sun Yuxi, according to attendees. He warned that the deal couldn't be renegotiated because EU rules prohibit restructuring public procurement contracts.

At one meeting, the Chinese ambassador, according to one witness, promised Covec would fulfill its obligation for the sake of "Chinese honor." When the group reconvened the following afternoon, the ambassador delivered a different message, this person said, saying China's government had limited leverage with an "independent company." The Chinese ambassador didn't respond to requests for comment.

The roads chief at GDDKiA, Mr. Witecki, says that on June 9, Covec's president Mr. Fang told him work could resume for another $320 million. That would have made the total cost 70% higher than Covec had bid for the project.

Hours later, the Polish government fired the Chinese builder. Covec executives were shocked. They said, " 'Oh my God, this isn't possible,' " recalled Pawel Osowski, a Covec media adviser who was with them.

With Covec out, European builders were hired to finish the road, but at a higher price.

GDDKiA expected to offset the added costs with project completion guarantees pledged at the project onset by Covec and its partners, which were supposed to become available if the construction halted. The problem: Most of that money, $37 million, was deposited in Chinese bank accounts and is now hung up in a snarl of red tape and legal action. GDDKiA has filed lawsuits in Beijing and Zhengzhou courts against bank branches in those cities trying to win release of the funds.

Asked whether he would ever hire a Chinese construction company again, Mr. Witecki of GDDKiA said: "We have to build roads. We need trustworthy partners."