Year in review: Clearing the road block

After more than three years of development, China’s Belt and Road initiative seemed to achieve greater clarity this year, but more work is needed for it to make better financial sense to external investors.

Discussions over China’s “One Belt One Road” initiative have been heating up as projects attempted to make headway during 2017.

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

Although there isn’t an official leading agency or a solid framework for such an initiative, the Chinese government mulled the Silk Road Fund, the Asian Infrastructure Investment Bank, and other government-level partnership vehicles as part of its efforts to deliver the agenda, while at the same time signing multi-billion dollar deals with countries under the BRI and bringing along its state-owned entities and development agencies.

It is not a new prospect for Chinese companies to invest abroad. Chinese contractors have been building projects in emerging markets such as Southeast Asia, Africa and Latin America for a decade or more. What is new about the BRI is that the idea becomes an easy-to-remember term, in a bid to formulate the more ambitious, strategic move of building Chinese influence in global affairs by investing in the developing regions.

Chinese government releases showed that 50 SOEs have invested or participated in nearly 1,700 projects across emerging markets over the past three years. While Chinese companies remain a key force in driving the agenda, international strategic players, financial investors, and professional services providers, are gearing up to explore the world’s emerging economies – where new infrastructure is desperately needed.

GE Energy Financial Services and Silk Road Fund formed an energy-focused platform to target assets in such regions under the BRI in November, while Hong Kong Monetary Authority, investment manager of the city’s foreign currency reserve, has been seeking partners to co-invest in BRI projects in the past few months. Deloitte allocated a $200 million strategic investment to develop talent and capability to capture opportunities emerging from the initiative, and banks such as Standard Chartered and HSBC are looking to tap the potential financing opportunities from the scheme.

New projects worth more than $350 billion are expected in the BRI-targeted regions over the next five years, according to estimates from a report by Baker McKenzie and Silk Road Associates.

Despite a promising future filled with opportunities, the masterplan encountered several setbacks this year. In November, the new administration in Nepal reportedly decided to scrap a deal to develop a $2.5 billion hydroelectric power dam project in Budhi Gandaki with Chinese SOE China Gezhouba Group.

It was shortly followed by Pakistan, which pulled out of its partnership with China in the $14 billion Diamer-Bhasha dam development and decided to finance the project by itself. The Pakistani government refused to accept strict terms offered by its Chinese counterpart and the case highlights the lack of a transparent, public and competitive tender procurement.

“They [the deals] cannot be analysed as investments in the conventional financial sense,” wrote Peter Guy, a former World Bank Group officer in a commentary for the South China Morning Post.

The view was echoed by Jonathan Beard, an executive director at Arcadis, who said he has seen projects supported by solid domestic demand fall apart during procurement, as well as schemes with various degrees of commercial logic and aggressive capacity estimates pushed forward. He also noted the track record of many Chinese players now operating in overseas markets is very mixed.

The agenda of connecting Asia (or to be exact, China) with the rest of the world through infrastructure certainly took shape this year, at least on a conceptual level. However, lots of effort will be needed for the initiative to make more sense on a financial level as the New Year comes around.