The Belt and Road’s twisting turns

When speaking of Asian infrastructure opportunities, one cannot avoid talking about China’s ‘Belt and Road Initiative’. During our recent Hong Kong Summit, more than 60 delegates joined a BRI-themed workshop, which kicked off the three-day event. Its purpose was to try to pin down what the BRI is all about.

Here are a few of the key talking points:

It’s still hard to define BRI projects

With discussions over the BRI heating up this year, it’s still difficult to decide whether a project falls under the ‘One Belt One Road’ initiative, noted Jonathan Beard, Arcadis’s executive director and head of transportation and logistics consultancy in Asia.

The BRI policy, or OBOR initiative, was proposed by China’s President Xi Jinping in 2013, as a masterplan to build infrastructure and connect China and Eurasian countries along the ancient Silk Road routes, to promote trade and economic growth.

While the Belt refers to the classic overland Silk Road that stretches from China to Europe, the Road also covers much of Southeast Asia, the Middle East and eastern Africa through a maritime route.

The China-led scheme is now joined by more than 60 countries, mostly emerging economies, some of which don’t sit in traditional ‘Belt and Road’ areas. With the likes of Australia, New Zealand and Latin America all saying they are part of the scheme, what qualifies as a BRI project is still far from straightforward.

Keep an eye on bankability

Defining BRI projects might still require further clarification, but one thing is certain: BRI countries have huge infrastructure needs and as such offer great opportunities. They also pose plenty of risks.

A new report by Baker McKenzie and Silk Road Associates estimated the BRI presents new projects worth more than $350 billion over the next five years. However, many of them will be located in emerging markets, and as InfraCo Asia’s chief executive Allard Nooy noted in Hong Kong, project bankability poses a challenge for investors. “Around 55 to 65 percent of projects in emerging markets are not bankable without support from governments or multilateral development agencies,” he noted.

Geopolitical risks are another major concern, since the life of an infrastructure asset generally outlasts political mandates. Also, underdeveloped regulatory frameworks and operational risks are key considerations when investing in BRI projects.

As Nooy stressed, long-term horizons are needed here.

Chinese SOEs dominate

While China has been at pains to point out that OBOR is open to investors from all corners of the globe, Chinese contractors and state-owned enterprises are currently dominating delivery of BRI projects. Chinese government statements indicated that 50 Chinese state-owned enterprises have invested or participated in nearly 1,700 projects across the region over the past three years, driven by the country’s “going out” policy.

Despite infrastructure projects getting done, Beard observed that some of the BRI projects are not necessarily delivering greater benefits to local communities. He has also seen projects supported by solid domestic demand go wrong during procurement, as well as projects with varying degrees of commercial logic and aggressive capacity estimates pushed forward. Therefore, he noted that the track record of many of the Chinese players now operating in overseas markets is very mixed.

As Nooy pointed out, though, OBOR is “not just China’s initiative, but a multilateral one. It is not just about Chinese outbound investments, but about unlocking economic development in these countries”.

That means international and Chinese investors need to keep their eyes wide open as the initiative evolves over time and their due diligence efforts focused on the fundamentals of the projects being procured and the countries where they are located.