Four years ago Xi Jinping formally launched his Belt and Road Initiative while on a trip to Central Asia. Chinese acquisitions in the 68 countries associated with his signature foreign policy had this year surpassed $33 billion by August, which is even more than in the entirety of last year, according to data from Thomson Reuters.
But how effectively is the capital being deployed? WiC talked to Jonathan Beard, an executive director at Arcadis, a leading global design and consultancy firm for infrastructure and environmental solutions, to gauge his view on the commercial progress of the plan.
In his role as head of transportation and logistics for Arcadis in Asia, Beard focuses on advisory work for some of the largest ports, airports and surface transportation projects in the region. His customers are commercial developers, governments and multilateral lenders like the Asian Infrastructure Investment Bank – just the kind of clients at the forefront of Belt and Road investment.
Can Belt and Road already be termed a success?
Beard: The policy was only introduced in 2013 so most of the early investments in infrastructure projects are at an initial phase. That means it’s far too early to judge whether the programme is a success in general.
Another challenge is that policymakers haven’t offered a formal definition of the types of project that should be classed within the blueprint. I think that’s probably deliberate as the ambiguity allows for greater flexibility. Plenty of companies have been taking advantage by re-titling their longer standing projects as Belt and Road deals, or describing new investments in the same way even when they lack Belt and Road flavour.
For instance, we’ve seen a series of land reclamations and plans for ‘new city’ zones announced in this way, when they look much more like property deals than infrastructure investment.
Describing them as ‘Belt and Road’ guarantees more attention from the media, however, and perhaps a more favourable hearing from investors and lenders.
It’s also true that some of the activity that is being termed as Belt and Road spending would have happened anyway, purely as a consequence of deeper-seated trends like China’s emergence into the global economy. The developing world needs more investment in infrastructure and China’s construction and engineering firms have a new focus on winning contracts in overseas markets. But I still think it’s fair to say that Belt and Road is acting as an accelerator in speeding up spending on transport infrastructure.
Where has Belt and Road advanced furthest?
Probably in Pakistan in terms of capital already committed, as well as the scale of investment relative to the host country’s GDP.
Malaysia is another contender in terms of wider excitement about the potential for investment, with plans for a high-speed railway line, talk about a number of new ports and the promise of the East Coast Rail Line [not a high-speed link but a more standard track].
In some countries the progress has been more stop-start, like Sri Lanka, where a new terminal at the port of Colombo has been relatively successful, but a port zone further south in Hambantota has run into difficulties.
In other markets there has been a lot less activity. India is the obvious example: as a leading member of BRICS and the second biggest shareholder in the Asian Infrastructure Investment Bank, it should be getting more focus if Belt and Road is going to be as transformative as policymakers are proposing. But the politics of the relationship between Beijing and New Delhi are a complicating factor and investment there has been limited.
Which firms are winning the contracts? Are companies from host nations getting a fair share?
The major participants are the Chinese contractors, who have secured more than 80% of the engineering work so far. The main players are well known: the state-owned construction firms, the railway builders and the port operators.
Sometimes the Chinese firms are winning contracts without an obvious tendering process, but in other cases the hosts are trying to stipulate that homegrown companies must get a share of the business. The Malaysians are requiring that 30% of the work on the East Coast Rail Line has to go to local suppliers and contractors, for instance.
Of course, local participation requires more than Chinese agreement – the host country needs to be active in negotiating and developing the projects concerned. Local involvement will generally improve the prospects for projects at a political level but it presupposes that firms in the host countries have the skills and expertise to do the work, which isn’t always the case.
All the same, Belt and Road investment is still regarded as great news in the countries concerned, especially for those that lack access to Western loans and who desperately need the infrastructure that the Chinese are offering to build.
Is investment classed as ‘Belt and Road’ if the Chinese aren’t directly involved?
That’s an interesting question. The Chinese have said that they welcome participation from other countries but it is still to be tested whether a project would continue to be termed as a Belt and Road engagement if contractors from China aren’t involved.
In this regard it will be interesting to see what happens with the plans for the high-speed rail line through Malaysia to Singapore. Technically, the construction contract is open for international bidding and the Japanese are trying to win it. If they do win it, will the railway still be classed as a Belt and Road deal? It’s not clear.
Are the ports and railways going to be viable on a standalone basis?
It’s too early to judge the commercial returns although there are clearly some cases in which profit motives have been secondary to broader policy objectives.
Broadly, when addressing whether a project is going to be profitable, it’s best to look at the commercial logic first, with basic questions about whether a port or railway is going to generate enough income to cover its costs.
In many cases the opportunities are there but so are the potential pitfalls, especially in higher-risk locations or in cases where the traffic may not be enough to support a sustainable business.
Another challenge in some markets is that rival projects are competing for investment in what looks like an uncoordinated way.
Take Malaysia, which has a plan for a lot of spending on ports with varying degrees of commercial logic. If all of this new capacity is built it will easily surpass anything that Malaysia needs domestically, which means that the ports will need transshipment traffic to make them viable. That’s a challenge for the newcomers, who will have to take business away from more established hubs like Singapore, or simply cannibalise traffic from other Malaysian ports.
Any other tips for spotting which of the investment cases are strongest?
In general, projects look more promising if they start out with feasibility studies that are made available for public scrutiny. Bidding processes for construction should also be open and transparent.
The way that the new railways and ports are financed can be important as well. Direct investment or project finance with some kind of private sector participation is best, rather than concessionary loans from Beijing to the host nation.
We’ve already seen how some of the bigger-ticket lending at sovereign level has run into difficulties in Sri Lanka [where China Merchants Ports has taken a controlling stake in a trade zone in Hambantota in a debt-for-equity swap after Sri Lanka asked to renegotiate its loan repayments].
With private-sector capital, or loans from the multilateral banks, the chances are greater that the project is going to be sustainable, and that it will be run professionally.
Another indicator is the manner in which the Chinese firms are getting involved. Participants in port or railway deals, who take on a role as investors and operators, will stick around over the longer term, rather than just building the infrastructure and handing it over. Some of them bring business as well, such as Cosco Ports, whose shipping lines are customers for its container terminals.
Simply put, owner-operators have more incentive to make a piece of infrastructure work, making the business case more than a matter of announcing that ‘it’s a Belt and Road deal’.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.