REUTERS | Nir Elias

The Chinese “Belt and Road” initiative

In the run up to 23 June 2016, there is a danger that the UK is so caught up in the throes of Brexit that it ignores news of exciting opportunities further afield. One such opportunity is the Chinese “Belt and Road” initiative (also known as One Belt One Road or OBOR).

This initiative, which is central to China’s economic plan, has been causing a stir in the world of global infrastructure, as it presents significant opportunities for funders, international consultants and professional service providers. This post takes a look at this exciting initiative in more detail.

So what’s it all about?

The Belt and Road initiative is a major development strategy launched by the Chinese government in September 2013 to sponsor and promote economic co-operation among countries along the proposed Belt and Road routes.

The history to the name is rather interesting:

  • The “Belt” refers to the Silk Road Economic Belt across Eurasia, which is a programme of land-based infrastructure development aimed at establishing an economic corridor from China to Western Europe.
  • The “Road” refers to the 21st-Century Maritime Silk Road, which is a maritime route connecting China with ports on the South China Sea, the Indian Ocean and the South Pacific, to be supported by Chinese-backed infrastructure development.

The Belt and Road encompasses a broad range of development opportunities including road, rail and port projects and the creation and expansion of power and communications networks in locations including Indonesia, Pakistan and Western Europe.

Contractors on Belt and Road projects are likely to be predominately Chinese state-owned enterprises, particularly in the initiative’s early stages. However, the Belt and Road is likely to present significant opportunities for funders, international consultants and professional service providers in the infrastructure space.

Raising awareness… the Belt and Road summit

On 18 May 2016, the Hong Kong Special Administrative Region Government (HKSARG) and the People’s Bank of China, in association with the Hong Kong Trade Development Council (HKTDC) hosted the Belt and Road Summit. This summit brought together a broad range of professionals working in the infrastructure industry and underlined the key challenges that will need to be addressed if the Belt and Road is to be a success.

The summit’s keynote speaker was his excellency Mr Zhang Dejiang, Chairman of the Standing Committee of the National People’s Republic of China, widely seen as the third most prominent official in the Chinese government. Mr Zhang emphasised that the Belt and Road would “boost mutual investment and trade between China and the countries along the routes” and was intended to pursue “infrastructure connectivity”.

The summit’s Chairman also emphasised Hong Kong’s role as a “super-connector” with an advantage in providing professional services and by continuing its historical role as a cultural and economic bridge between East and West.

Challenges and opportunities

China is understandably seeking to project an optimistic vision of the Belt and Road’s promise. However, it is important to keep sight of the many challenges that need to be overcome before the full potential of the Belt and Road initiative can be realised. A number of these challenges were highlighted in a session on transportation and logistics infrastructure that took place at the summit.

Mr Neil Johnson, the Managing Director of Macquarie Infrastructure and Real Assets, a global infrastructure asset manager, highlighted the immense scale of the funding required to deliver the Belt and Road’s objectives, which is estimated to be in the range of US$9 trillion.

Mr Johnson noted that many of the countries along the Belt and Road are developing economies that lack well-developed institutional frameworks. Infrastructure projects located in these jurisdictions will entail a comparatively high level of commercial, development and sovereign risk, which could dissuade private funders from participating. However, the investment needs of the Belt and Road cannot be met without a high level of private sector funding.

In order to ensure that private funders feel confident participating in Belt and Road projects, Mr Johnson considered that developing economies and project sponsors along the Belt and Road must:

  • Establish a strong pipeline of projects so that private participants have sufficient incentive to investigate and assess the opportunities available in the relevant jurisdictions.
  • Develop and distribute robust concession frameworks to underpin prospective projects and to ensure that project risks are transparently assessed and efficiently shared.

Mr Johnson also said multilateral development banks (MDBs) have an important role in the early stages of the Belt and Road initiative. MDBs, through their support and investment in key projects, could provide comfort to the private sector that Belt and Road projects represented a reasonable use of funds, and measurable and considered risk. This would encourage the increased participation of private sector funding.

Mr Julian Vella, KPMG’s Asia Pacific Head of Global Infrastructure made similar points and added that it was important for Belt and Road projects to be properly prioritised. Some projects would be attractive to private sector funders. Other projects would be unattractive to international participants from the private sector, notwithstanding that such projects may be desirable for domestic political or economic reasons. To ensure that the Belt and Road had maximum impact, it was important that developers prioritised projects with private sector appeal so as to promote the availability of private sector funds.

What now?

The Belt and Road is a key part of China’s economic plan and will continue to be in the headlines for a long time to come. If you are interested in keeping up to date as it progresses, look out for our OBOR Insights, which is a monthly email newsletter, providing a selection of key OBOR stories.

Berwin Leighton Paisner LLP Patrick Daley

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