What happens when huge international development projects fail?

BY Wade Shepard

Forbes Asia: Not long ago, few governments or companies would dream of building large-scale infrastructure in another country. It was seen as being too risky and the timeline for returns too long-term. But in the relative global calm and heightened interconnectivity of the early 21st century, the building of bridges, roads and even entire cities on foreign soil has become standard operating procedure for many powerful nations and big engineering firms, as the international infrastructure development scene crescendos to a proverbial free-for-all.

China is building new cities in Georgia, Egypt, Malaysia and Sri Lanka; a German company built an entirely new town in China; an American company built a state-of-the-art new city from scratch in South Korea; a developer from Abu Dhabi is building a new district in Belgrade; Japan is pumping hundreds of billions of dollars into rail lines, metro systems, bridges and ports in places like India, Bangladesh, the Philippines and Cambodia.

What’s more, as China advances across Asia and Africa with its Belt and Road Initiative, a competitive dynamic has been established as other regional powers appear to be scurrying to land as many big ticket international infrastructure projects as they can -- before China swipes them all up.
But what happens when foreign developers don’t properly take the local governmental processes, culture, business ecosystem, consumer market or even physical terrain into account? What happens when big dreams and solid plans are sabotaged by local competitors? What happens when governments change and the new bosses have little interest in continuing the projects of their predecessors? These questions are not rhetorical; they are painfully being answered with experience all over the emerging markets of the world today.

Hambantota
Billions of dollars worth of Chinese money was pumped into building a new deep sea port, an international airport, a conference centre, a stadium and new highways in a remote area in the south of Sri Lanka. The plan was to construct an entirely new urban centre that would complement Colombo and economically invigorate an underdeveloped part of the country. 

Ideally, the endeavour would have helped Sri Lanka achieve its domestic economic and development ambitions and China would have gained a foothold in a part of the world that sits directly along its primary Middle East energy supply line, which would also serve as a major node on its newly emerging Maritime Silk Road. It was to be a win-win for both parties.

However, this happy ending has yet to transpire. The government administration that signed the deals with China to fund and build the Hambantota projects got voted out of power in 2015 in exchange for rivals who ran on a platform of opposing such Chinese investment -- claiming that it was riddled with corruption and didn’t favour Sri Lanka. The new administration made good on their claims that if they won the election they would immediately cancel their predecessors’ Chinese engagements — for a couple of months anyway.

Apparently finding it more difficult to wipe away internationally binding agreements than it was to win an election by claiming they would do so, Sri Lanka’s new government was left with little choice but to start up Hambantota again.

However, by this point Sri Lanka found itself perilously buried in debt and looked to China for relief. Working with a country that was fast becoming financially and politically bankrupt, China agreed to a debt-for-equity swap where the China Merchants shipping company would pay off US $ 1.1 billion of Sri Lanka’s US $ 8 billion worth of Chinese-owned debt in exchange for an 80 percent share of the Hambantota port. This deal, which has been largely interpreted as Sri Lanka selling itself out to China, provoked a huge amount of public outcry and discontent, which has occasionally boiled over into violent demonstrations and is still not settled.

So rather than developing a key transport-oriented new city in a strategic location on the Indian Ocean, China instead found itself in the middle of a convoluted political family feud, which is showing little sign of being worked out — and this doesn’t even scratch the surface on the Colombo Financial City quagmire, a 269-hectare, US $ 1.4 billion new financial district being funded and built by China on reclaimed land off the coast of Colombo, which also qualified for this list.

A2 highway project
When you bring up Chinese investment in Poland, you will almost invariably provoke a story of the ill-fated A2 highway project.

This was the first big foray into European infrastructure investment for a Chinese company and really demonstrated that the emerging superpower in the east had a lot to learn about how business is done in the west. 

In 2009, the China Overseas Engineering Group (COVEC) won a major tender to build a highway across Poland. They not only submitted the lowest bid but did so in attention-grabbing style -- claiming that they could do the job at half the price that Poland expected it to cost. This startlingly low bid produced a massive wave of public outcry, with it being (perhaps unfairly) assumed that the Chinese firm was going to cut corners, do shoddy work, take the money and run.

However, the COVEC worked out their budget with the assumption that they would hire local contractors, labourers, materials and equipment but they soon found themselves blackballed by Poland’s established construction ecosystem. Disgruntled and perhaps fearful that a Chinese firm had just strode into Europe and undercut everyone, Poland’s usual cast of construction companies refused to cooperate with the COVEC, meaning that the Chinese firm was unexpectedly forced to import everything from China -- driving up their costs of operation considerably.

The COVEC attempted to renegotiate the contract with the Polish government but quickly found that in Europe a deal is a deal. The Chinese firm halted work in protest; Poland sued. By 2011, the COVEC’s European adventure was over -- and someone else built the road.