A troubled bridge over Balkan waters

A troubled bridge over Balkan waters
One of Europe's largest bridges will cross the Peljesac straits that currently divide the tourist hub of Dubrovnik from the rest of Croatia.
By Clare Nuttall and Carmen Simion in Bucharest May 7, 2018

Croatian Prime Minister Andrej Plenkovic last month hailed the deal to build the Peljesac bridge as a lasting benefit of the country’s EU membership, after Croatia’s state road operator signed a deal with the China Road and Bridge Corporation (CRBC) to build the bridge, one of Europe’s largest. 

Securing financing and signing a deal on the construction was a breakthrough for Plenkovic’s government; previously, the project had been discussed in Zagreb for two decades, having been taken up and dropped by successive governments.

Yet the €281mn deal with the CRBC-led consortium is already the source of controversy.

Not only is the bridge fiercely opposed by neighbouring Bosnia, which claims access to its Neum port will be cut off for larger ships, the tender process that ended in the selection of the consortium to build the EU-financed bridge has been challenged by rival bidders for the contract. 

Croatian road operator Hrvatske Ceste signed the HRK2.08bn contract with CBRC, which is owned by the world’s third-largest engineering firm, China Communications Construction Company (CCCC), on April 23. The Chinese-led consortium will build the bridge between the Croatian mainland and the Peljesac peninsula, which is the first part of an investment the total cost of which is estimated at over €500mn, according to analysts from the Warsaw-based Centre for Eastern Studies (OSW).

“This is a project that will make Croatia unique, this project is of strategic and long-term significance for the entire country … This bridge will remain a symbol of the added value of the first seven years of Croatian membership in the EU,” the prime minister commented after the deal was signed, highlighting the importance of the project. 

Croatia’s top tourist destination

The bridge will connect the Dubrovnik area to the rest of Croatia, supporting the development of the region, and giving a helping hand to its already thriving tourist industry. Tourism accounted, directly and indirectly, for 24.7% of GDP in 2016, according to the World Travel & Tourism Council (WTTC), and this figure is projected to rise to 31.5% by 2027. 

The economy in the Dubrovnik area, in particular, is heavily reliant on tourism. The ancient walled city was the single most popular destination for tourists visiting Croatia last year, attracting 1.17mn visitors in total, 19% up on the year. Not only that, but its profile has been raised even further following the success of the HBO series Game of Thrones, which was partly shot in the Croatian resort.

Construction of the bridge would significantly shorten the trip to the region; currently, anyone looking to visit must cross a small stretch of land belonging to Bosnia & Herzegovina on their way to Dubrovnik. It will, therefore, add to other efforts by Zagreb to make the country's tourism sector even more lucrative. Nearly €1bn is expected to be invested in the tourism industry this year, which is 15% more than last year and 40% more than in 2016, Tourism Minister Gari Cappelli has said.

The bridge would also be beneficial to trade, as it would smooth flow of goods. Now, cars travelling to and from the Dubrovnik area have to cross the border with Bosnia twice, which causes long delays, especially during the summer season when it congestion is highest.

At the same time, the bridge would reinforce the territorial cohesion of the South Dalmatia region with the rest of the country. 

Two decades of dithering 

The idea of a bridge connecting the two parts of the country was first put forward in the late 1990s by the prefect of Dubrovnik-Neretva county, according to Total Croatia News. Politicians from Croatia’s main parties — Plenkovic’s Croatian Democratic Union (HDZ) and the rival Social Democratic Party (SDP) — changed their minds several times about how beneficial its construction would be, but the project was later proclaimed of strategical national importance and repeatedly brought up during electoral campaigns.

On the other hand, Bosnia has long objected to the project, with Sarajevo claiming it will prevent large ships from entering the port of Neum — though Plenkovic claims the design of the bridge will ensure this doesn’t happen. Another criticism is that it will lead to the isolation of Croats living in the Neum area in Bosnia. 

The Neum strip has been in Bosnian hands since 1699, when it was deliberately ceded to Bosnia by the city state of Ragusa (now Dubrovnik) to create a buffer zone against Venetian expansion. 

It now makes up Bosnia’s only 12km of Adriatic coastline, which includes the resort and port town of Neum, and Sarajevo has appealed to EU institutions not to allow the Peljesac bridge to go ahead, though so far without success. 

A new deal for CRBC

Well before the deal between Hrvatske Ceste and CRBC was signed, China had already become a major investor in Southeast Europe. Following COSCO’s acquisition of Piraeus Port in Greece, the Balkan peninsula is seen as a gateway to the markets of Central Europe as Beijing seeks to revive trading routes between Europe and the Far East with the multi-continental Belt and Road Initiative (BRI). Chinese involvement extends to numerous road projects in Southeast Europe, along with mainly coal-fired power plants, and the upgrade of the Belgrade-Budapest railway.

Typically, these projects are funded by soft loans from Chinese state-controlled banks, and the main contractors are Chinese engineering firms. This structure has been welcomed in Central and Southeast Europe where governments are hungry for investment into transport and energy infrastructure, though concerns have been raised about the large debt burdens placed on some countries participating in the BRI. Those at risk of debt distress include Montenegro from the region, as well as three Central Asian economies, according to Washington-based think tank the Center for Global Development. 

The Plejsiac bridge contract is different from most of the projects being carried out or planned by Chinese companies in the Balkans because it is being funded by the EU; in fact, it’s the largest project activity co-financed by Brussels since 2009, OSW analysts point out. It is part of a wider project on road connectivity with the southern Dalmatia region, for which the European Commission approved grants worth €357mn in 2017, covering 85% percent of eligible costs.

This means the project will come under a kind of scrutiny that other Chinese-built projects in the region have not — for example, governments in the Western Balkans often seek funding from Chinese banks to build new coal-fired power stations as fossil fuel-based projects are now eschewed by many international development banks.

Questions have also been raised about the selection of contractors for such projects. This has resulted in criticism of Beijing’s approach to funding infrastructure projects in regions such as Southeast Europe, and warnings that this type of cooperation could open the way for conflict between states in the region and the EU, which Croatia’s southern neighbours are eager to join. 

“Despite being much welcomed by a region in urgent need of capital, Chinese investments and policies along the Balkan Silk Road not only risk public resentment and unsustainable debt on local governments, but could undermine political determination for crucial reforms required for EU accession,” warned Adam Urosevic, risk analysis at business intelligence company ViennEast, in a comment for bne IntelliNews

“In recent years, China has established a considerable presence in a region where countries are desperate for infrastructure investment and lack access to European structural funds … But such developments haven’t come without scrutiny from Brussels, which sees Chinese investment as undermining EU standards,” wrote independent Paris-based European affairs consultant Henry Stanek, also for bne IntelliNews.

The Peljesac bridge is likely to change things — but it’s not clear yet whether this will be for better or worse. 

OSW analysts Mateusz Seroka and Jakub Jakóbowski wrote in an April 25 comment that winning the tender — in an EU state for a project funded with EU money — could benefit CRBC. It should also, if successful, open the way for more investments in the same vein. “The project will give the CRBC experience in infrastructure construction in the EU, which will be an important advantage when competing for future tenders,” they wrote. 

“Beijing’s priority still lies with the projects financed by Chinese banks in which the Chinese side can choose the contractor. However, this approach has met with criticism from the EU. Winning an open tender will allow China to avoid conflict with the EC in this field.”

However, the growing controversy surrounding the allocation of the tender could result in more, rather than less, conflict. 

Rival bidder Strabag, a major Austrian construction company, has already filed a complaint with the Administrative Court in Zagreb over the selection of the CRBC-led consortium to build the bridge. It wants work on the bridge to be suspended until the legal battle it has initiated is resolved. 

Strabag had previously complained about the “unusually low prices” in its rival’s bid. At HRK2.6bn, its own offer was considerably higher than CRBC’s. The third bidder, a consortium comprising Italy’s Astaldi and Turkey’s IC Ictas, which offered to carry out the works for HRK2.5bn, has filed a separate complaint. Both complaints were dismissed by the Croatian State Commission for the Supervision of the Public Procurement Procedure (DKOM) earlier this year.

If the conflict with Strabag results in work being suspended, Seroka and Jakóbowski warn, that “would be detrimental both to the image of the government and of the Croatian subcontractors, who according to media reports could carry out 30%-40% of the necessary work.”

Not only that, but there could be wider consequences beyond Croatia and across the EU, where European engineering and construction firms generally don’t welcome competition from their Chinese rivals. “China’s expansion within the field of tenders for infrastructure construction within the EU has met with a negative reaction from European companies which currently have a dominant position on the market,” say the OSW analysts. Arguments used by opponents include “allegations of dumping practices, and that Chinese companies are being supported with state subsidies”. 

“This is in line with the EU institutions’ currently predominant narrative about the need for reciprocity in EU companies’ access to the public procurement market in China and Chinese projects within the Belt and Road Initiative,” they say. “If the dispute over Peljesac worsens, the question of Chinese companies’ access to further tenders may gain in importance on the EU’s China agenda.”