Structure of Project
In 2013 China launched the Belt and Road Initiative, an infrastructure investment plan that aims to develop connectivity with 70 countries and which today is one of the points of the force of Chinese economic diplomacy. Above all, it is an infrastructure investment program that aims to develop connectivity and collaboration between China and at least 70 other leasehold countries in an area that accounts for one-third of world GDP, accounts for at least 70% of the population and owns more than 75% of global energy reserves.
According to the Chinese authorities, the primary objective of the BIS is to create a large integrated Eurasian economic area, expanding the existing links with the European Union. Six transport corridors will be created, by land and by sea, which will allow China to diversify its trade routes by directing its surplus production towards new markets, to access new sources of energy supply and to expand China's political and economic influence. Within the BRI, Chinese investments in Eurasia have already exceeded 50 billion and have contributed to the creation of 56 economic development zones in 20 countries, 14 of which are in South-East Asia. Overall, in 2016, Chinese companies won 126 billion contracts in 61 countries (+36% year-on-year).
The Action Plan for the BRI drawn up by the Beijing government provides for two main lines of action, along the lines of the ancient Silk Road. The Silk Road Economic Belt will connect not only the production centers in southern China to European consumer markets by rail through Central Asia (Kazakhstan) but also Russia to Turkey, via Pakistan and Iran, and India through South-East Asia (Thailand and Myanmar). The development of this first route, in detail, will result in the strengthening of six economic corridors: the new Eurasian land bridge, an international railway that will connect the Chinese province of Jiangsu to Rotterdam and will reduce the average shipping time of goods from five to three weeks; the China - Mongolia - Russia corridor to be built through the integration of railways and motorways and the introduction of customs and transport facilities between the three countries. In addition, a connection between China - Central Asia - Western Asia will be established from the Chinese province of Xinjiang to the coasts of the Middle East and the Arabian Peninsula; the China - Indochina Peninsula corridor will link the country to Singapore, contributing to the development of states along the Mekong River (Myanmar, Thailand, Laos, Cambodia, and Vietnam). Finally, the China-Pakistan corridor and the Bangladesh-China-India-Myanmar corridor will be implemented. The maritime route, the so-called Maritime Silk Road, will allow Chinese goods to reach the Mediterranean through Suez - extending to the coasts of East Africa (Djibouti, Kenya and Tanzania) and the Maghreb - and the rest of Asia through the South China Sea.
In addition to the two routes, sea and land, the Chinese government in January 2018 introduced the concept of "Polar Silk Road" for international cooperation in the development of infrastructure and energy resources, fisheries, tourism and especially routes that are being created as a result of global warming. With the gradual melting of the ice, Chinese ships will, in fact, prefer to reach the ports of Northern Europe through the Arctic Ocean. The polar routes also allow an estimated time saving of 25-30%. The convenience of the polar routes is greater for the regions located in northern Vietnam: containers leaving from China (including Hong Kong) to Central Europe will find it cheaper to travel across the Arctic Ocean. There are two Arctic routes for the passage of goods: the one known as "the north-east passage", to the north of Russia, which would allow you to get faster to the port of Rotterdam (today it takes 48 days); and the north-west passage, which passes over Canada. The use of this passage would represent a saving of time compared to another route: the one that passes through the Panama Canal. However, studies on the exploitation of this route are not yet at an appreciable level, despite the fact that the potential of the north-west passage is quite considerable. The choice of route will also depend, obviously, on the type of goods transported. "The polar route will have a double arrow and will be used for both export and import. China is interested in importing raw materials and above all gas from the north of Russia.
Until now, the Arctic route has never been drawn on maps. However, Beijing has for some time been implementing a policy of acquiring port infrastructures, doubling its investments from 9.97 billion dollars to 20 billion dollars, with an acceleration on the Arctic routes. From 2012 to the first half of last year, China invested 89.4 billion dollars in the development of polar ice, confirming its leading role in the region. He has conducted eight scientific expeditions to the Arctic Ocean (to 2017) and founded a research base in 2003 on the Norwegian island of Svalbard.
Finally, China in recent months has also expressed the intention to create an Air Silk Road to encourage the increase of the country's connections with the rest of the world and thus consolidate, at the same time, the national aviation industry. Analyzing the various corridors envisaged by the BIS, there is a significant increase in the number of railway routes that will connect Asia both internally and with Europe. According to some estimates, in fact, once fully operational, the railways of the New Silk Road will be able to handle at least 500,000 containers a year, creating new commercial opportunities and promoting the economic development of an area, Central Asia, which today is one of the least connected regions at the international level and among the most promising in terms of potential growth.
Finance problem
One of the most controversial issues for the implementation of at least 266 projects envisaged by the BIS is certainly the financial one, considering that, according to some estimates, a total investment of at least 1,700 billion dollars would be necessary (but there are other estimates that quantify the need in 4,000 billion dollars). In 2017 alone, according to the Chinese National Bureau of Statistics, the volume of trade between China and countries along the Belt and Road was RMB 7,400 billion (about Euro 950 billion): a figure that represented an increase of almost 18% over the previous year and over 14% of China's total foreign trade. In the same year, according to Chinese estimates, the investments made in the countries of the BRI area amounted to 14.4 billion dollars (excluding the banking and insurance sector). Moreover, according to Oxford Economics, in the period 2018-2022 China will invest at least 130 billion dollars a year in BIS projects, which will mainly concern the energy and transport sectors.
To solve the problem of financing China has created a special fund, the Silk Road Fund of 40 billion dollars to support infrastructure development and manufacturing industry of the countries involved in the initiative. In addition, the Asian Infrastructure Investment Bank (AIIB), which has been operating since May 2016 and has Italy as one of its founding members and is Europe's fourth largest shareholder with 2.58% of the capital, has a budget of USD 100 billion. For the time being, the Institute has financed 24 projects for a total of 4.2 billion dollars in the energy, transport and water sectors.
Other financial institutions of priority interest to the BRI include:
- Industrial and Commercial Bank of China (ICBC), which has a $460 billion fund dedicated to the development of projects related to the New Silk Road;
- CITIC Group, which in June 2015 announced investments of 113 billion dollars in BIS projects;
- China Investment Corporation (CIC), which is already in a relationship with CDP and has shown interest both in investing in Italian funds and in carrying out joint operations in third countries. In general, the financial scheme that will be most used will be that of Public-Private Partnerships (PPPs).
- Investments and loans from the Chinese banking sector for the implementation of BIS projects (in billion dollars).
Thanks to BRI China wants to achieve more than ambitious strategic goals; the most important for foreign companies is the Chinese desire to build companies worldwide as an extension of the "Go Global" policy of the 90s. The Chinese government also expects the BRI to support industrial restructuring as its companies learn to compete on a global scale by adopting international standards and acquiring technologies on a global scale and space on foreign markets. The amount currently available for BIS projects represents a small fraction of the annual investment required. This is a complicated situation as the participation of other actors in the financial efforts required by the project will largely depend on the guarantees that the project managers (primarily China) will be able to give in terms of transparency in both the administrative and fund management. Formally, the Silk Road Fund promises to allocate financial resources according to "market principles", but the fear that the project will benefit above all Chinese companies and that money flows will be lost in opaque allocations is strong.
Opportunities and risks of projects
So far, Chinese state-owned companies have developed projects for the construction of roads, bridges, railways and energy projects in the most stimulating countries in the area. Another potential horizon for success is large real estate construction projects. The landlocked Belt connects two of the world's largest economies: China and Europe. This corridor with its immense logistical potential offers significant opportunities in the energy and mining sectors. By 2025, the BIS will open up to other sectors that will then be able to benefit from the new infrastructure. These include technology, industry, logistics and storage. Not everyone will be able to benefit equally from the impact of the BIS. Small and mid-sized economies will be the first to feel the impact of major projects aimed at a larger economy that will bring substantial benefits to them. China's influence on the regional supply chain will tend to grow. In fact, the development of industrial parks along the BIS trajectory is planned to intercept work at low cost, avoid high duties and meet local potential. Chinese companies will work on monetizing what surrounds large infrastructure projects as an alternative to project financing and creating real estate opportunities. But the BIS, apparently for the sole benefit of Chinese companies, addresses most of the opportunities related to this huge project to international companies and there are 10 markets that will produce 66% of the GDP of the Belt & Road Initiative, excluding China. These markets (India, Russia, Indonesia, Korea, Turkey, Saudi Arabia, Iran, Thailand, Taiwan and Poland) will benefit from most of the business opportunities. Opportunities to supply products to Chinese contractors mainly arise where environmental standards are high or where projects require more advanced technologies. With the financing of major multilateral banking institutions (primarily the World Bank), foreign companies will find additional opportunities to participate in BIS projects, in addition to the fact that foreign companies will find growth opportunities to help Chinese partners manage their risks in BIS countries, while project sponsors begin to take a harder stance on Chinese participation. Chinese companies have encountered difficulties in entering more mature and competitive markets in Southeast Asia and the Gulf and it is here that foreign companies can find the greatest business opportunities.
The BRI project aims to profoundly restructure industrial production, making it more automated, technological, quality and able to dominate some strategic sectors of the global economy such as robotics, information technology and aeronautics. The basis of this project is Beijing's awareness that the industrial model adopted to date, based on low-cost, low-quality production, is no longer able to sustain the country's domestic economy. With the redefinition of the Chinese economic development model, the country's previous role as a global manufacturing workshop shifts to other economies, while Chinese products and services climb the value chain and compete with European products in technology-intensive sectors. Through this ambitious financing plan, China, if it does not want to soon find itself with a stagnant economy, will have to adopt an industrial model 4.0, which provides for the application of the tools of information technology to production.
Technology, Media and Telecommunications (TMT) Foreign investment in TMT will contribute to increased demand for telematics equipment and services with growth expected to be exponential if not explosive. Consumer goods and retail. China's investment in roads, railways and energy across Africa will increase revenue by stimulating the already growing organized retail and catering sectors.
Industry, Production and Transport. Chinese companies intend to accelerate their acquisition of technologies and companies to support their global expansion strategy. The growth of national protectionism, linked to the BIS, suggests the establishment of local plants by Chinese manufacturers, especially in large markets such as India and Indonesia.
Energy, Mining and Infrastructure. Chinese investments in the energy sector will be of considerable interest in BIS projects. Land acquisition is easier when it comes to building new roads or railways, especially in densely populated countries. With the growth of the BIS, Chinese contractors will have to rely more on market mechanisms than on government relations to win works and settle contractual disputes in the infrastructure sector.
Opportunities for international companies in the BRI will meet through:
- Partnership building - Some Chinese contractors have signed joint venture or cooperation agreements to create more convincing proposals. Others seek partnerships with local businesses to manage relations with governments and local communities.
- Supply - especially where environmental or safety standards are high
- Professional services - Professional services companies are crucial for Chinese companies that want to reduce risks. Project due diligence, corporate structuring, contract negotiation, labor and tax regulation as well as insurance requirements are all of crucial interest to offshore business. Corporate social responsibility management is also particularly critical for the BIS as large infrastructure projects can transfer communities, damage the environment and attract the attention of social activists.
- Acquisitions - Chinese contractors are seeking to acquire the most advanced technologies to compete in major BIS markets. These technologies will be particularly important in markets where Chinese state-owned companies want to win international tenders or where restrictive environmental standards are required.
- Financing - As the BIS grows in scale, the presence of Chinese political banks in projects will decline, leaving room for foreign asset management funds in China's search for alternative financing funds. These interventions will help to structure the projects in such a way as to attract private capital from both China and globally, representing additional financing opportunities for climate and sustainability.
The opportunities offered by the BIS will certainly bring with them challenges and risks that should not be underestimated. The corridors will pass through Africa, Asia and Europe exposing participating companies to political, credit and security risks. Many recipient countries of Chinese funds are already bearing a high level of indebtedness and the BIS will further weaken their credit position. Many of the countries along the BIS have been rated very low by the rating agency Fitch. This significantly increases the risks for Chinese banks financing parts of the project. In addition, China's growing regional influence will increase geopolitical risks as it crosses India's traditional sphere of influence.
Comments