A preliminary evaluation of Belt and Road Initiative

The routes of Belt and Road (“B&R”) involve countries in Central Asia, Southeast Asia, South Asia, Middle East, North Africa, East Africa and Europe. The scale is extensive. From one perspective, eagerness to participate in B&R projects can be seen all across China. All the 31 provinces have introduced or are in the process of introducing plans for participation, covering various fields such as infrastructure building, industrial investments, economic and trade cooperation, cooperation in energy and resources, financial cooperation, people-to-people and cultural cooperation, ecological environment, maritime cooperation, etc.

In the recent years, China’s economy has gone into a “new normal” where  growth has slowed down. The economy is in need of structural adjustments. Inevitably, certain industries are facing problems of inadequate demand and excess capacity. Prior to the 18th National Congress of the Communist Party of China, China has achieved a high two-digit economic growth, which means that the production capacity at that time was capable of supporting two-digit economic growth. The economic growth has now declined to the range of between 6.5% to 6.7%. So it is quite understandable that excess capacity would arise.

From the perspective of structural adjustments of China’s economy, B&R offers the opportunities for outward release of these capacities. This is the reason why Chinese leaders have been putting emphasis on getting China to collaborate with other countries in the area of production capacity.  This should be good news for many enterprises in China.

Moreover, China is equipped with strong engineering and technical capabilities in the area of infrastructure building, such as high-speed rail, highways, telecommunication, ports, airports and transmission of oil, gas and electricity, etc. In fact, China is often viewed as the “country of infrastructure building”.

The key to B&R is finance. Asian Infrastructure Investment Bank with a registered capital of US$ 100 billion and “Silk Road Fund” with a scale of US$ 40 billion are both supporting the development of key projects in the countries along the routes. This is also the strength for the B&R development. Securing financing for B&R projects through international funds, financial institutions and other intermediaries could also balance some of the risks in opening up the capital account of China.

Production capacity, technology for infrastructure and capital are the factors that provide effective support for the B&R Initiative. At the same time, as B&R is in line with the developmental needs of the countries situated along the routes, this initiative is widely supported by these countries. Many of the countries along the routes are in need of infrastructure upgrading too. A number of these countries are developing countries with insufficient capital and technology for infrastructure development. The experience and industrial production capacity of China in the infrastructure development will complement the needs of these countries. In addition, the free trade zones, cross-border economic cooperation zones as well as all types of industrial parks in the countries along the routes are also areas that could benefit from this initiative.

Issues yet to be clarified in Belt and Road

As B&R involves a lot of countries, massive resources are required to be committed and the impacts on various sectors in the countries are significant, attention should be given to clarify issues regarding certain fields.

First of all, the current policies and projects related to B&R are primarily led by the Chinese government. The B&R leadership team at the central government level is led by National Development and Reform Commission (“NDRC”). NDRC is responsible for formulating the relevant policies at the central government level. The relevant government departments at the respective regions have also prepared the relevant plans. Although some lists have been announced, these are far from sufficient as far as the outside world is concerned as a lot more specific details are required. It is absolutely necessary to draw up specific action plans relating to B&R. At the minimum, it should include the specific countries that would be involved as well as the key regions and projects that would be targeted at.

It is worth noting that, before the action plans are introduced, China should fully engage the countries along the routes in communication and negotiation. It should be prepared to deal with the issues that the other parties are concerned with so as to avoid approaching them based purely on China’s own wishful thinking. As far as possible, China should also avoid positioning the host countries merely as the countries that provide energy and resources as this might stir up resentment locally. It is important to take the development strategies of the countries along the routes into consideration in the relevant action plans so that these are interlinked and reinforcing each other.

Secondly, the nature and the applicable scope of the B&R have to be clearly defined further. It has to be segregated from other organizations and agreements which are of regional cooperation in nature. The strength of the B&R lies in economic cooperation in various fields such as economic and trade, financial, infrastructure, third-party development cooperation. However, there are currently all kinds of events organized across different regions, including the research projects undertaken by think tanks, conventions and exhibitions, which are all wearing the hat of B&R.

The topics of discussion in these events often involved politics, security, culture, etc., which have led to some unnecessary negative effects. On the one hand, such overly broad interpretation of the B&R would cause some concerns about issues outside economic fields among the government and society of the countries along the routes. On the other hand, too much emphasis placed on the strategic nature of the B&R would lead to ambiguity in the roles played by other regional economic and trade cooperation agreements.

For instance, a number of people from ASEAN countries have doubts about how division of work and partnership would be carried out between the B&R and the Regional Comprehensive Economic Partnership (“RCEP”). Such situation tends to bring unnecessary problems and barriers to the economic cooperation in the future.

Third is about concrete plans for policy implementation. Currently, a number of countries along the routes do not know which specific organizations and agencies in China are responsible for implementing the B&R Initiative. Under the framework of the B&R leadership team, NDRC is the leading agency responsible for formulating the relevant policies. However, as far as the countries along the routes are concerned, many other government departments are also publicizing B&R to the outside world.

It is unclear to the countries along the routes as to which are the authoritative organizations coordinating the implementation and formulation of programs for the B&R. For instance, China Development Bank (“CDB”) is fairly active in the realm of B&R related policies and projects. However, the roles and the positions taken by the NDRC and CDB in the course of implementing the B&R Initiative seem to be unclear to the countries along the routes. In addition, some local governments are also promoting the B&R projects. The issue here is that to which government departments should their provisions be relied upon as the principles for implementation.

Fourth, besides the issue of coordination among the various departments, business enterprises appear to have been disconnected from the B&R. In principle, B&R should be an initiative where the government would propose the relevant policies while the enterprises would be the main body that carry out economic cooperations and trade. However, the current situation indicates that the government’s policies and initiatives are taking the central stage while the adoption by the enterprises are somewhat limited, resulting in a misplacement of main body. As a matter of fact, many enterprises, including private enterprises, do have the desire to “go global”. The role of the government is to find ways to support and serve the enterprises that are going global through relevant policies.

Invariably, the main body for overseas economic cooperation has to be the business enterprises. The government’s policies should focus on helping the enterprises going global to overcome the barriers. For instance, in a recent survey of more than 50 state-owned enterprises (“SOEs”) undertaken by Deloitte has shown that access to capital and risk management and control are the two main barriers faced by the enterprises going global. The government could open up the financing platforms such as the Silk Road Fund to the enterprises embarking on outbound investments as a way to resolve the challenges faced by enterprises that go global. At the same time, the government could also publish investment guidelines to help the enterprises understand the potential investment risks involved.

Investment risks in Belt and Road projects

Fifth, evaluating the feasibility of future projects of all types is another key issue in the implementation of B&R. Currently, many projects are primarily investments in infrastructure. In principle, infrastructure projects are characterized by large investment scale, long investment payback periods and low investment yields. In addition, the market volatility in some developing countries is high, imposing limitation on the ability to manage and control debts and foreign exchange. The risks involved in long-term investments in these countries are higher. This is also the reason why many countries along the routes are facing investment gap for infrastructure. Without good investment options and project design, the likelihood of private capital participating in the investment is low.

If the investment could be recouped from long-term earnings derived from these projects, the injection of capital by the Chinese government or the SOEs could boost the confidence of other investors, which could be conducive toward the completion of these projects. However, the key issue is whether Chinese government or the SOEs would eventually carry out the relevant evaluation of the investment risks of these projects. If the government injects funds, it has to be prepared to take risk. It may be necessary for the government to pay for the project development expenditure.

Moreover, when the Chinese government has made too much promise to a particular project (for example, in Indonesia’s high-speed rail project, China has promised not to utilize Indonesia’s national budget and that no government guarantee is required, etc.), the expectations of the countries along the routes on investments for other projects in the future would also be changed accordingly. This may result in the Chinese government or the SOEs having to undertake more financial liabilities and risks.

Such problem has in fact arisen and is rather serious. As the conditions given by the Chinese parties were too favourable, the countries concerned began to engage in “policy rent-seeking” for B&R. In other words, they went after the benefits, asked for money from China, but has not  shared much responsibility. For instance, the progress of Indonesia’s high-speed rail project has been slow, with half of the land not completely expropriated yet. The project work has been delayed. This was mainly attributable to the overly favourable conditions offered by China. All the parties from Indonesia did not have to bear the responsibilities. Overly favourable policies have resulted in Indonesia not regarding itself as a “stakeholder”. The delay in project work would only harm the interests of Chinese parties and not the interests of Indonesian parties.

Sixth, the SOEs should reconsider the institutional building of B&R. Since the beginning of mid-1990s in the last century, the SOEs have begun to “go global”. At the same time, the SOEs have also undertaken many strategic overseas investments. As far as strategic investments are concerned, economic benefits are not necessarily the main consideration. As discussed above, the main emphasis of the B&R is mutual economic benefits.

The main emphasis in the future investments of the SOEs will have to be oriented primarily toward “business and commercial terms”. The SOEs should focus on the benefits and effectiveness. At the same time, the performance of the SOEs in the market has to be linked to the incentive mechanism for their management team. The SOEs should not use the B&R projects as a means to unilaterally export Chinese capital but to earn profits there  for the country.

For now, there are two points, in particular, worth noting. First of all, it is very important to evaluate the project risks. Many of the investments undertaken by the SOEs are infrastructure building projects that require large sum of capital and the risks involved are high. In the recent years, certain large-scale infrastructure projects that China has invested and participated in were postponed or halted for all kinds of reasons by the host countries.

In addition, volatility in the commodity prices in the international market would also bring on risks. For instance, the falling oil prices globally has resulted in substantial reduction in the financial resources of Venezuela. There was a lack of supporting funds to carry out the early phase of infrastructure building, resulting in losses incurred by China Railway Engineering Corporation (“CREC”) in the Venezuela’s high-speed rail project. Moreover, changes in the tax rates, types of tax, labour and environmental protection laws in the host countries could also lead to inability to achieve the expected returns for the projects. There is also a need to think about establishing a crisis management and control mechanism to deal with  risks that have already arisen. For example, under what circumstances should the project be suspended. Under what circumstances should one resort to legal proceedings and so on.

Second, besides tightening up project evaluation, the relevant regulatory mechanisms applicable to enterprises involving in outbound investments need to be tightened. According to the report from Xinhua News Agency, the centrally-administered SOEs are currently holding massive amount of overseas assets of more than 5 trillion yuan. In addition, based on the investigation report issued by State-owned Assets Supervision and Administration Commission (“SASAC”) and forwarded by Xinhua News Agency, these overseas assets “basically were not subject to any audit. There remains a huge gap in supervision and regulation”.

In recent years, news about SOEs incurring losses overseas are not uncommon. It is necessary to regulate the conduct of the SOEs in undertaking overseas investments to safeguard the returns on investments. In addition, the amounts of overseas investments, merger and acquisition projects that some enterprises embarked on were huge. This would pose risks to the domestic financial institutions that provided financing to these enterprises.

The Chinese government should evaluate the progress and the development of B&R on regular basis. For instance, the progress of the B&R development should be checked against the preset schedules to determine the current status. In the meantime, perhaps a dedicated knowledge repository can be establish to summarize the experience on the success and failure in the past outbound co-operations and investment projects. All these experiences can be shared with enterprises that will be embarking on overseas investments in the future so as to increase their understanding of the local conditions.

The writer is the Director of East Asian Institute, National University of Singapore. The article represents only the personal views, first published in Lianhe Zaobao, 5 Sept 2017