Coming to four years since China’s unveiling of the One Belt One Road initiative, many substantial questions remain, which has implications for financing this ambitious project.
One Belt, One Road is an ambitious development initiative, a multi-trillion dollar plan to link Asia to Europe with an unbroken chain of modern infrastructure. It has the potential to kick start economic growth in countries stretching from the South China Sea to the English Channel.
Put forward by the Beijing government, funding for the infrastructure proposal has gained some traction lately with accumulated pledges of about US$240 billion, but private investors will need more persuasion before they commit fully.
The One Belt, One Road initiative was proposed by China in 2013 as a way to modernise trading routes running from East Asia to Europe. The “belt” represents land routes that would run through Central Asia and the Middle East before reaching Northern Europe. The “road” represents sea routes that pass Southeast Asia, South Asia and Africa, before turning northward up the Suez Canal and terminating in the Northern Adriatic Sea.
If successful, the initiative represents the world’s largest example of regional economic cooperation.
Altogether, it will connect about 80 countries with road, seaports, railways, and pipelines, covering roughly two-thirds of the world’s population, about a third of its GDP, and about a quarter of total global trade in goods and services.
ONE BELT ONE ROAD GAINS INITIAL FUNDING
As with any ambitious initiative, One Belt, One Road faces significant obstacles, and the first is financing. A crucial factor behind China’s economic miracle in the late 20th century was aggressive infrastructure investment, and to create similar infrastructure improvements through Asia and Africa, annual investment of US$2 trillion to US$3 trillion will be needed. Altogether, the initiative could need public and private investments roughly 12 times the size of the Marshall Plan that helped rebuild Europe after World War II.
Public funding for the effort has already raised hundreds of billions of dollars in pledges. For example, the Asian Infrastructure Investment Bank, funded largely by China, has about US$100 billion available for the program. The Silk Road Fund, also set up by China, has about US$40 billion, and the New Development Bank, which focuses on projects in Brazil, Russia, India, and China, has another US$100 billion. These commitments show the seriousness China and other countries along the route are giving the One Belt, One Road initiative.
While this committed US$240 billion is roughly the annual GDP of Finland, it is still less than an eighth of what is needed annually to finance the infrastructure needs of the emerging economies along the land and sea routes. Further commitments will be needed, not only from developing markets that would be the direct beneficiaries of the infrastructure improvements, but also from European governments that would benefit from improved trade connections as well as private investors.
Meanwhile, the world is watching closely to see whether China’s enthusiasm for the initiative might ebb following a slowdown in the country’s economic growth rates in recent years.
TRANSPARENT IN ADMINISTRATION AND INVESTMENT
With funding sources starting to materialize, the second major challenge in attacking the One Belt, One Road initiative is to create transparency in all aspects of administration and investment. Private investors especially will hesitate to join the effort unless they are persuaded that the funds and assets will be used effectively.
In particular, how the available funds will be deployed and how the programme will be administered remain critical uncertainties that hinder further commitments. This is because infrastructure investment in emerging markets is notoriously risky, and corruption and wasteful bureaucracies remain unfortunate realities for many of the countries along the routes. So public and private investors will want some assurances that the funds are not being misused on over-priced projects with no real impact on promoting trade.
China, as the primary promoter of the initiative, should take the lead in assuaging these concerns. For China, the initiative has an economic and a political dimension, and officials should be crystal clear on their motives and the economic rationale. If rhetoric can be matched with action, investor scepticism can be turned around.
Operations and projects supported by the investment funds will be scrutinised with some questions in mind. First, can One Belt One Road show that its investments follow market principles? Second, do projects adopt a clear regulatory system that transcends borders? Third, is there an appropriate balance between public and private investment such that risks are shared? If these questions are answered, they can change how private investors think about risk in these regions and for the project.
MIXED RECEPTION BY GOVERNMENTS
Governments outside China have given the One Belt, One Road initiative mixed receptions. Some, for instance Indonesia and Malaysia, have welcomed the proposal, focusing primarily on the economic benefits it could deliver. For others, however, the economics are muddled by geopolitical disputes and other challenges, such as the conflicting territorial claims to the Spratly Islands in the South China Sea, which make bi- and multilateral discussions about funding and project priorities more complicated.
Countries that are not directly on One Belt One Road land or sea routes, such as Japan and the United States, are also likely to focus on potential political implications. For example, concerns have been raised of whether One Belt One Road will expand China’s economic influence at the expense of these countries. This may be the case especially if the Asian Infrastructure Investment Bank tries to wrestle influence from more established institutions led by developed countries such as the US, like the Asian Development Bank and the World Bank.
MOST WILL WAIT AND SEE
Faced with these obstacles, it would be easy for investors to wait on the sidelines until there are more certainties around the One Belt, One Road initiative. Outstanding questions should give any executive pause: Is this primarily a foreign policy play by China? Do the economics actually work? Is the geographic breadth too big? Will returns be realised?
While it might still be too early to commit financially unless these questions are answered, aggressive companies will want to devote resources to staying informed of its progress and be ready to commit if the opportunity arises.
On the flipside, for most private and public investors, it is also still too early to decide to opt out. Doing so might relegate them to watching as others seize the opportunities presented by the world largest single trade and development initiative.
Diaan-Yi Lin is managing partner, Singapore and Joseph Luc Ngai is managing partner, Greater China in McKinsey and Company.