BEIJING - China Overseas Engineering Group (COVEC) is withdrawing from a $447 million highway construction project in Poland after incurring heavy losses.

The cancellation comes just two years after the company became the first Chinese enterprise to win a large European highway contract.

COVEC is a subsidiary of China Railway Engineering Corp (CREC), one of Asia's largest construction and engineering companies. The Beijing-based company won the bid to build two sections of Poland's A2 highway, which will stretch 49 kilometers and run from Warsaw to the German border, in 2009.

The People's Daily reported on Friday that COVEC has decided to terminate the contract, because it has suffered huge losses and there is a shortage of capital for the project.

COVEC said the actual cost of the A2 highway project has far exceeded its expectations, the People's Daily reported.

The company said the total cost of the A2 highway construction will reach $786 million, 76 percent higher than the original estimate, as its Polish partner imposed a higher construction standard and the price of building materials soared unexpectedly.

"Chinese enterprises should adopt stringent measures to safeguard State-owned assets, as overseas investment has a large asset risk," said Chen Huanzhong, a partner at the Beijing-based Global Law Office.

The Financial Times reported that the Polish road authority also canceled the contract with COVEC on Monday, although the decision will take 14 days to become legal.

Neither COVEC nor the Polish Embassy in Beijing would comment on the matter when contacted by China Daily

The People's Daily said COVEC has invested more than $140 million in the project since it began in July last year, and has finished nearly 20 percent of the construction.

The Polish Prime Minister Donald Tusk has pledged to complete the highway before the 2012 European Football Championships, which Poland is co-hosting with Ukraine.

The Polish road agency is demanding compensation of 741 million zlotys ($271.1 million) from COVEC and plans to restart construction by the end of July, according to the Financial Times.

COVEC is also claiming compensation from its Polish partner, according to the reports in the People's Daily.

"Chinese enterprises should try to become familiar with international law and the market environment in foreign countries when expanding abroad," said Zhang Xiang, a spokeswoman for the China International Contractors Association.

China Daily

(China Daily 06/18/2011 page9)