“Why are they giving us the money?” Behind China’s plans to “rescue” a decrepit rail link (News)

At 11.25am a whistle blows and our spray paint-smeared train pulls out of Belgrade’s 130-year-old central station, over weeds and crumbling concrete, past decades of neglect.

For the next half-hour we move at barely walking pace, crawling past old signal boxes, creaking over a narrow, rusty bridge.

Gradually we pick up speed. Not much, though. The single-track Belgrade-Budapest line was built in 1883 and last renovated in the 1960s. It’s not in a good way.

Children stare glumly out the windows at endless flat fields of unripe wheat, rippling green under the Central European sun.

There will be nine hours of this. Testing for even the biggest wheatfield fans.

At 8.24pm: stop number 25, Budapest. We’ve travelled roughly the distance of Sydney to Canberra, or Melbourne to Warrnambool, at an average speed of 30km/h, sometimes much slower. At one point we pause for half an hour then spend the rest of the trip going backwards.

“This is a catastrophe,” laughed passenger Gabriella, 43, who takes this train for a portion of its journey several times a week for work. “It smells like wet dog shit and it’s slow.”

One winter day she spent her journey counting deer in the snow out the window. She got to 72 before she gave up.

Some of Europe’s famous train trips promise old-fashioned romance, others high-tech speed.

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The Belgrade to Budapest line delivers new, almost inconceivable levels of dullness.

But here’s the good news: China has promised to fix this. To help fund and build a modern, high-speed connection that will cut the journey time by a factor of three (making it just about faster than driving).

Gabriella has heard. She’s excited at the prospect.

“The only question is, why are they giving us the money?” she says.

It’s a very good question.

All aboard?

In February, Germany’s then foreign minister Sigmar Gabriel gave a surprisingly frank assessment of what he believed China is up to in Europe right now.

“The initiative for a new Silk Road is not what some people in Germany believe it to be – it is not a sentimental nod to Marco Polo,” he told the Munich Security Conference.

“Rather (it) stands for an attempt to establish a comprehensive system to shape the world according to China’s interests.”

He didn’t blame China for trying it on, he said. But that didn’t mean Europe should let it happen.

“Powers such as China and Russia are constantly trying to test and undermine the unity of the European Union. Individual states or groups are tested with sticks and carrots to see whether they want to remain in the community that is the European Union.”

We have looked at China’s leading role as an opportunity rather than a threat.

He, and other politicians in Berlin and Brussels, want to push back. There have been talks of a counter-Belt and Road fund, a way to export liberal European values counter to China’s vision of a new world order.

Others believe this is an overreaction, a paranoid filter on a sensible, globalising economy. But if what Gabriel fears is true, nowhere is it more true than in that most recalcitrant EU member state Hungary, which hosts the second half of our interminable train trip.

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“We in this region have looked at China’s leading role in the new world order as an opportunity rather than a threat,” Hungary’s foreign minister, Peter Szijjarto, said last November – as his prime minister, Viktor Orban, prepared to sign 11 bilateral agreements with China and announced the opening of tenders for the Hungarian section of the train link to Belgrade, at the 16+1 summit in Budapest.

The 1 is China and the 16 are 11 eastern EU nations and five other European countries on the Balkan peninsula. The 16+1 format was born in 2012, with a permanent secretariat and yearly meetings.

The Belgrade-Budapest railway is intended to be a breakthrough project for 16+1.

But here’s a funny thing: no-one really asked for it.

Mystery train

“Most Western and Hungarian experts say it’s insane to build the Belgrade-Budapest railway line,” says Tamas Matura, founder of the Central and Eastern European Center for Asian studies and assistant professor at the University of Budapest.

The government’s official justification for the project is literally a state secret. But academics have reverse-engineered the proposed $3.6-billion Hungarian leg, 152 kilometres of double-track railway over mostly flat ground, engineered to a 160km/h top speed and designed to take passenger trains and 750-metre-long freight trains.

There’s currently almost no commerce on this route, and less passenger traffic. Eastern Europe’s traditional connections go east-west, not north-south. Hungary’s biggest trade partners are in western Europe, and to a lesser extent Ukraine and Russia. Serbia is almost not on the chart.

It will take 2500 years to make a profit on the Belgrade-Budapest line.

And the link doesn’t come cheap. The Hungarian section will cost 750 billion forints ($3.6bn), 85 per cent financed by Chinese loans. Plus interest, the whole project will cost an extra $1 billion – and according to reports, the interest rate will be higher if Chinese companies don’t win the construction tenders (a matter of some contention, as EU rules insist on transparent, competitive public procurement).

On current figures, even given a generous multiplication factor for new trade opportunities, it will take 2500 years to make a profit on the Belgrade-Budapest line, says Matura. And that’s assuming it doesn’t need maintenance.

This is “building pyramids” kind of thinking, says another Hungarian expert, Adam Bartha, director at EpiCenter, the European Policy Information Center. And he points out that Hungary is the second-largest net recipient of EU funds per capita after Poland, so it was never about the money anyway.

Matura agrees: “Central Europe is not in need of liquidity, we have money,” he says. “And even if we want to build certain infrastructure projects, we get non-refundable European money.”

Says Bartha: “There are a lot of unanswered questions about this project.”

Build it and they will come

From Beijing’s perspective, the railway makes more sense.

China’s biggest shipping company, COSCO, bought a majority stake in the big Piraeus port in Greece in 2009.

The Belt Road Initiative (BRI) plan is to link China’s maritime routes from Asia, around Africa and into the heart of Europe via Piraeus – which is being aggressively expanded, with a plan to double its container volume in the next couple of years.

Hungary’s foreign minister Szijjarto says the train line from Belgrade to Hungary will be part of the main transport route for Chinese goods that arrive at Piraeus and head into Europe.

But Matura suspects that China has based its plans on a misunderstanding of the region – they just “looked at a map” rather than doing the sums, he says.

“To be fair, the Chinese way of thinking is very different from the Western,” he says. “We have a demand-based way of thinking: if there is a demand for something, we supply. In China it’s completely the other way around … there is even an ancient Chinese saying, ‘let’s build a road and they shall come’.”

It’s a win-win proposition for China, anyway. They have insisted on guarantees so they will get their money back, plus interest, no matter what happens with the railway. Of course, they would prefer that it stimulates trade but it’s not essential.

And, once complete, it will be a demonstration project for Chinese companies keen to tap into the European market.

But that doesn’t explain why Hungary wants this train line, where there are many other infrastructure projects that would provide a bigger economic boost for the country – nor why it wants China to fund and build it.

“Big question mark. Pretty big question mark,” says Matura.

Eva Balogh, a historian and publisher who blogs on Hungarian current affairs, wrote in November that the very unprofitability of the project explains the decision to go to China.

“The lure of the project, if it ever becomes reality, is that China might use Hungary as a distribution hub,” she said. “For that elusive prospect, the Orban government is ready to get involved in this risky venture.”

Matura says there is also some limited political value for Orban in having big non-EU investors: Hungary is one of the EU’s most perverse members, an “illiberal democracy” that often zags when Brussels zigs. Big allies outside Europe help Orban flaunt his independence.

An invisible inside track

But other knowledgeable observers, who spoke to The Age-SMH asking not to be identified, say there’s a more obvious reason the Hungarian government loves a big public project funded by a big pot of money: the opportunity to parcel it out to their mates.

Systemic corruption in Hungary’s public procurement system adds more than 20 per cent to the cost of government contracts, according to Transparency International. “In many cases the private sector trust in public procurement processes is so low that they don’t even bother to bid,” it said in a recent report.

The timeline on the tender process for the new train line was remarkably short – often an indicator that a tender has an invisible inside track.

Neither tender bidders nor the winner have yet been made public, but it’s very likely the money will end up, in part, in the pockets of oligarchs closest to the government, many of whom have become remarkably rich in recent years.

In 2016, a researcher from the Central European University in Budapest, Anita Koncsik, wrote that public procurement has become Hungary’s “most important payout channel enabling the allocation of state funds to government-friendly economic players”.

So much for Hungary. But is China getting more than a nice rate of return?

“For the first few years of 16+1 relations I really believed the Chinese intentions were mainly focused on economics,” says Matura.

“But it seems that in the past few years it turned towards political influence. I don’t know whether it was intentional from the very beginning or they changed their minds because they realised that the economic cooperation wasn’t going well.”

How 16+1 is adding up

To the 16 members of the 16+1’s dismay, the economic flow from China has been much bigger in Europe’s west than east. Chinese foreign direct investments in the EU reached 35 billion euros in 2016, a 77 per cent increase over the previous year. Bloomberg has calculated that around 360 European companies have been taken over by China, from Italian tyre-maker Pirelli to Irish aircraft leasing company Avolon Holdings Ltd. It has gobbled up office towers in the City of London, a German robot maker, a Scandinavian carmaker and a Swiss pesticide maker.

Germany has tightened its investment rules in response. It is concerned about “technology flow” from Germany to China as well as security questions, its economy minister said in February.

France and Italy have joined in a push for a tighter screening regime for outside investments allowing the European Commission the right to supervise investments.

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But while the west pushes back, there are some signs in Europe’s east of more favourable China policies.

In 2016, Hungary and Greece blocked the common position of the EU Council on China’s activities in the South China Sea. They were joined by Croatia and Slovenia. And in 2017, Hungary and the Czech Republic signed a joint declaration on the principles of financing BRI, against the recommendation of the European Commission.

The EU is increasingly suspicious that BRI is a part of the inspiration for this dissent. And it objects to the way China does business.

In April, Handelsblatt reported that 27 of the 28 national EU ambassadors to Beijing had compiled a report sharply criticising the Silk Road project because it “runs counter to the EU agenda for liberalising trade and pushes the balance of power in favour of subsidised Chinese companies”.

Only Hungary’s ambassador refused to sign the report, which was part of preparations for an EU-China summit in July.

The report said China was seeking to shape globalisation to suit its own interests, and should be pushed to adhere to European principles of transparency in public procurement, as well as environmental and social standards.

Whenever European politicians travel to China they are put under pressure to sign bilateral agreements to expand the Silk Road, the ambassadors said – deals that “lead to an unequal distribution of power which China exploits”.

Are we there yet?

Not everyone is panicking over China’s presence in Europe’s east, though.

A paper by Polish think tank OSW last September found that “Beijing has not succeeded in making an attractive offer to the region’s EU member states, who make up the majority of the participants in the 16+1 format”.

If China has a “strategy of divide et impera, aimed at breaking up the unity of the European Union” it was not having much effect, the paper said.

“The much-discussed infrastructure cooperation has not even started,” authors Jakub Jakobowski and Marcin Kaczmarski wrote. “Consequently, Beijing has failed to obtain the political tools which could have weakened policy coherence at the European level, or even divided the EU.”

China has two big problems driving the BRI into the EU, the authors wrote.

Their funding model linking loans to the appointment of the contractor without an open tender is incompatible with EU law.

And the EU just isn’t short of money at the moment.

“Allegations appearing in the public debate that the countries of the 16+1 have been fostering divisions within the EU seem to be substantially incorrect,” the OSW paper said. “As long as Central and Eastern Europe remains capable of pursuing its economic and developmental interests within the architecture of the European Union, the political risks coming from China’s capital inflow will remain limited.”

Much like that train from Belgrade, it’s proving a slow, sometimes frustrating journey for the Chinese as they try to push their influence north and west.