By ECFR
-    Mathieu Duchâtel, Deputy Director of the Asia and China Programme, European Council on Foreign Relations
-    Alexandre Sheldon Duplaix, Researcher-Lecturer, French Defense Historical Service

Summary

• China’s Maritime Silk Road is about power and international influence, but Europeans should not overlook the importance for China of further developing its blue economy, which already represents 10 percent of China’s GDP.

• The Maritime Silk Road already affects Europe in five main areas: maritime trade, shipbuilding, emerging growth niches in the blue economy, the global presence of the Chinese navy, and the competition for international influence.

• On balance, the Maritime Silk Road creates more competition in Europe-China relations, but it also creates space for cooperation in the blue economy and for specific maritime security missions.

• Europe should emulate China’s blue economy as an engine of growth and wealth, and encourage innovation to respond to well-funded Chinese industrial and R&D policies.

• Europeans should strengthen their contribution to maintaining a strategic balance in the Indo-Pacific region and uphold their vision of a rules-based maritime order.

Introduction

"If you want to be rich, build a road first" (要想富，先修路). There is rarely a conversation about Xi Jinping's Belt and Road Initiative (BRI) – his plan for greater connectivity for China across both land and sea – in which this six-character proverb does not crop up. But in the shape of the Maritime Silk Road part of the strategy, the route exists already and is vital to China's ever-growing wealth. The sea lanes of communication from China to Europe through the Malacca-Suez route are among the busiest in the world. Twenty-five percent of world trade passes through the Malacca Strait alone. China-Europe maritime trade is three times larger than trade by air freight and Eurasian railways, while the last alternative – the Northern Route through the Arctic Ocean, that China dubs the "Ice Silk Road" – is only just starting to develop….

1. Europe and the Maritime Silk Road: engaging on Chinese terms….

2. Five key implications for Europe
2.1 Maritime Trade: China’s increasing global footprint….
2.2 The risk of slow death for the European shipbuilding industry….
2.3 Towards Chinese leadership in emerging strategic industries….
2.4 The new normal in Chinese naval presence worldwide….
2.5 Responding the intensified strategic competition in the Indo-Pacific….

3. Conclusion and policy recommendations

China’s policies on facilitating the growth of its blue economy and its construction of a powerful navy are transforming the global maritime environment in which Europeans operate. Both sides seek prosperity and security, and this can create opportunities. But overall the Maritime Silk Road presents Europe with serious challenges, and it will heighten the competition element in Europe-China relations. Europe should not turn its back on the opportunities that exist but it should not turn a blind eye to the challenges either.

• The EU should put in place an EU-wide investment-screening system, and soon.

Chinese investment in European ports can be unproblematic – until a critical size is reached. This point is reached when the scale of one project in a single country leads to excessive political influence, although this can also come about through the gradual establishment of a position of dominance which threatens fair competition. In third countries, the growth of Chinese influence through port infrastructure leaves no space for a ‘win-win’ game between Europe and China. In an ideal scenario, a greater Chinese economic presence in unstable states could lead to EU-China crisis management cooperation. But the absence of any significant achievements in this area so far indicates that such an outcome is unlikely. As a result, the EU and its member states should draw a clear line for themselves between investment that helps meet European long-term interests and investment that negatively affects Europe’s competitiveness. Besides introducing an EU-wide screening policy, equally important is the need for reflection within the EU institutions and among member states about how investment-screening should apply to the maritime domain and the blue economy. For internal use, the EU could produce a “white list” of areas where cooperation with China can operate on a basis of reciprocity. The EU should make clear to China that reciprocity should be the basis for investment exchanges in the blue economy. Experts understand that reciprocity is about fairness and non-discrimination, but there is a risk of misinterpretation on the Chinese side. Europeans should seek to mitigate this through clear explanations.

• Europe should look and learn from China’s blue economy as an engine of growth and wealth.

Europe should emulate China’s strong and well-funded policies on developing shipbuilding, deep sea exploration, offshore oil and gas exploration and exploitation, shipping, and on the availability of Chinese corporations and policy banks in supporting infrastructure projects worldwide. The EU and EU member states should encourage innovation in order to preserve a European niche of expertise in key sectors of the blue economy. That said, Europeans should keep in mind that a key Chinese weakness is the risk of public resources being wasted because of non-performing loans.

• EU member states with naval forces should respond to the trend of an increasingly proactive China by setting a perimeter for engagement in the maritime domain.

China is a potential partner for three types of naval operation. Two have already formed part of Sino-European cooperation: civilian evacuations and humanitarian escorts. The third – mine countermeasures – would likely come about as a response to terrorism or a war in the Persian Gulf that neither China nor Europe want. Djibouti offers an opportunity to engage with China in the near term, given the presence of several European militaries and of an EU task force in the Gulf of Aden. As a minimum, France, the UK, Germany, Italy, and Spain should exchange liaison officers with the PLAN command in the new base through their own military presence in Djibouti. As a trust-building exercise, they should offer an upgrade in military engagement with China through Djibouti on the PLA’s three priorities (peacekeeping, escorts, and humanitarian assistance), starting with the exchange of threat assessments. The annual limited-scale joint exercise conducted by the PLAN task force and the EU’s Operation Atalanta could also be upgraded to practise in the areas of evacuations and mine countermeasures.

• Europe’s naval presence in the Indo-Pacific should focus on the defence of international law principles and on the promotion of peace in conflict resolution.

In addition to the limited engagement with the PLAN described above, European countries should also step up their naval diplomacy and exercises with other regional actors. Europe already exerts influence through the sale of naval equipment to Australia, Singapore, India, South Korea, and Malaysia, although economic interests are arguably a more important driver for these exports than strategic considerations. Europeans should view their presence and defence cooperation as a contribution to preserving peace in the Indo-Pacific region through achieving strategic balance.

This analysis of the Maritime Silk Road reveals that Europe will increasingly need to consider its approach to China as a matter of grand strategy, and not as a collection of specific policy responses around competition and cooperation with Beijing. Nothing has yet forced Europe to pick a side between China and a US-led counterbalancing coalition in the Indo-Pacific region. But the time will come when it will have to decide, and this may not be a time of Europe’s own choosing. With Xi Jinping in power for the foreseeable future, pursuing a national strategy transparently aiming for global leadership, the international environment is evolving inexorably towards more bipolarity. In this context, what happens on, by, and beneath, the world’s seas will be crucial in the international race for power and influence.

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By Matthew P. Funaiole, Fellow, China Power Project
Jonathan E. Hillman, Fellow, Simon Chair in Political Economy, and Director, Reconnecting Asia Project

The issue:

• China’s Maritime Silk Road Initiative (MSRI) seeks to connect Beijing with trading hubs around the world.

• Beijing insists the MSRI is economically motivated , but some observers argue that China is primarily advancing its strategic objectives.

• This article examines several economic criteria that should be used when analyzing port projects associated with the MSRI.

China’s leaders have mapped out an ambitious plan, the Maritime Silk Road Initiative (MSRI), to establish three “blue economic passages” that will connect Beijing with economic hubs around the world. It is the maritime dimension of President Xi Jinping’s Belt and Road Initiative (BRI), which could include $1–4 trillion in new roads, railways, ports, and other infrastructure. Within this broad and ever-expanding construct, Chinese investments have been especially active in the Indo-Pacific region, raising questions about whether it is China’s economic or strategic interests that are driving major port investments.

The Indo-Pacific is already central to global commerce and will become even more important in the coming years. Each of the 10 busiest container ports in the world are situated along the shores of either the Pacific or Indian Ocean, and more than half of the world’s maritime trade in petroleum transits the Indian Ocean alone. The ocean’s commercial shipping volume has increased four-fold since 1970, with an estimated 9.84 billion tons of products being transported each year. Exports from Asian economies are expected to rise from 17 percent in 2010 to 28 percent in 2030, further indicating the economic vibrancy of the region.

Continuing this growth will require further reforms and investment. South Asia is the least integrated region in the world, with intraregional trade amounting for less than 5 percent of the region’s total trade. Standing in the way of further integration are “soft” infrastructure challenges, such as customs and trade barriers, as well as hard infrastructure challenges. The World Bank has estimated that between $1.7 trillion and $2.5 trillion needs to be invested in South Asia to close its infrastructure gap. As a result of these challenges, it is more than twice as expensive to export or import a container in South Asia than it is in East Asia.

Many of the same attributes that make a port commercially competitive can also increase its strategic utility. . . . deep water ports can accommodate larger commercial vessels as well as larger military ships.

Beijing insists the MSRI is intended to increase global integration and boost growth, but some analysts question China’s motivations, particularly those behind its investments in ports. During the first half of 2017 alone, Chinese companies announced plans to buy or invest in nine overseas ports, five of which are in the Indian Ocean. Those critical of the MSRI typically argue that while some economic factors may be at play, these investments are driven primarily by strategic objectives. At the heart of this critique is a concern that China will use ports associated with the MSRI to service military assets deployed to the region in support of China’s growing security interests. These concerns have focused on several port projects, including those in Gwadar, Pakistan; Hambantota, Sri Lanka; and Kyaukpyu, Myanmar.

One way to begin testing these competing narratives is to explore the economic viability of new port construction projects associated with the MSRI. To be sure, many of the same attributes that make a port commercially competitive can also increase its strategic utility. For example, deep water ports can accommodate larger commercial vessels as well as larger military ships. It is also true that ports with weak economic fundamentals are not necessarily strategic plays. Political incentives can also motivate the funding of questionable infrastructure projects. With few exceptions, however, these projects have been advertised by Beijing and recipient countries as economic opportunities. Examining the economic merits is a practical first step in assessing the motivations of the MSRI.

This article outlines three economic criteria that should be used when analyzing port projects associated with the MSRI: (1) proximity to major shipping lanes; (2) proximity to existing ports; and (3) hinterland connectivity. While far from exhaustive, these initial criteria are intended to lay the groundwork for more detailed assessments of individual port projects. The following sections explore these factors with reference to the three port projects (Gwadar, Hambantota, and Kyaukpyu) mentioned above.

Proximity to Shipping Lanes

One of the most important—and perhaps the most obvious—determinants of a port’s economic viability is its geographic location. Major ports are typically situated near busy shipping routes and benefit from topographical features such as deep channels or natural harbors. Sri Lanka, for instance, is strategically situated along the Europe-Asia trade route, which has contributed to Colombo Port’s status as the 25th busiest container port in the world.

More than half of the 7.6 million barrels of crude oil that China imports each day come from countries along the Persian Gulf.

In Sri Lanka’s Southern Province, a port at Hambantota is only 10–15 kilometers from the Europe-Asia trade route. Advocates for the port, which Chinese firms now operate, point out that it is even closer to those ship lanes than Colombo Port, which sits on Sri Lanka’s western coast. Given the volume of trade that travels along this maritime corridor—estimated to be 23.1 million twenty-foot equivalent units (TEUs) in 2017 and expected to grow in the coming years—they argue that Hambantota can succeed by capturing just a fraction of this traffic.

Gwadar’s proximity to shipping routes is less optimal than it appears at first glance. It is located at the mouth of the Gulf of Oman, a vital maritime passageway for tankers carrying petroleum from the Arabian Peninsula to the energy-hungry countries of East Asia. More than half of the 7.6 million barrels of crude oil that China imports each day come from countries along the Persian Gulf. However, Gwadar is too close to ports of departure to serve as an effective waypoint for ships traveling from the Persian Gulf to China. Beijing and Islamabad’s longer-term vision for Gwadar includes high-speed rail and road networks that could carry oil from ships arriving at Gwadar to Western China. This would reduce the total distance that oil would travel from the Persian Gulf to China, but increase transportation costs while incurring other risks, namely those associated with traveling through restive western Pakistan. At present, much of this supporting infrastructure is yet to be developed, as the final section of this article explains.

Proximity to Existing Port(s)

Given that most maritime traffic follows well-established routes designed to reduce shipping times, and thus costs, it comes as little surprise that some of the construction projects associated with the MSRI lie close to existing ports.

In general terms, the construction of a new port close to an established port makes economic sense if the established port cannot satisfy demand. In practice, assessing these factors is more challenging. Colombo Port, for instance, operates predominately as a transshipment port that services the Indian subcontinent, and has witnessed its throughput—measured in millions of TEU of containerized cargo—increase from 4.9 million TEUs in 2014 to 6.2 million TEUs in 2017. But with a reported capacity of 7.1 million TEUs and plans to further expand its capacity, Colombo is well-positioned to handle future growth in maritime trade.

If Colombo continues to expand its capacity to meet demands, Hambantota may struggle to attract shipping traffic well into the future. According to Sri Lanka’s Ministry of Shipping and Ports, only 183 ships arrived at Hambantota in 2017, down from 281 ships in 2016 —far less than the nearly 4,500 that annually visit Colombo. Most of the ships (40 percent) that did visit Hambantota over this period were vehicle container vessels, a result of the Sri Lanka Port Authority’s decision in 2012 to route vehicle carriers to Hambantota.

The case for Kyaukpyu is comparatively stronger. Some 200 nautical miles north of Kyaukpyu on the coastline of the Bay of Bengal is the much-maligned Port of Chittagong. For years, reports have indicated that Chittagong is congested and inefficient, with throughput in 2017 double that of the port’s designed capacity. Kyaukpyu could serve to alleviate this pressure, especially for vessels traveling between the Indian Ocean and the South China Sea. In 2017, over two-thirds of the port calls made at Chittagong by container ships and bulk carriers were conducted by vessels traveling (in either direction) between Colombo and ports along the Malacca/Singapore Straits.

Hinterland Connectivity

The commercial success of all three port projects hinges on improving their connectivity to the “hinterland” (areas located further inland). The specific requirements of this connectivity depend on the services that each port aims to provide. For example, connectivity requirements are lower for ports specializing in transshipment, which involves moving cargo between ships rather than transporting it along overland routes. Nonetheless, all three ports aspire to be more than just transshipment hubs.

At Gwadar, port facilities have advanced faster than the area’s supporting infrastructure. The port recently received its first container ship, but the lack of adequate transport connections—particularly roads and rail—between Gwadar and the more developed areas of Pakistan hamper the port’s operations. An uptick in shipping traffic at Gwadar, particularly cargo destined for locations elsewhere in Pakistan, would result in serious delays due to the area’s limited connectivity. Importantly, connectivity isn’t just limited to transportation. Ample water and power supplies are also critical. Reports also indicate a shortage of basic services at Gwadar, including potable water.

The commercial success of all three port projects hinges on improving their connectivity to the “hinterland.”

Much like Gwadar, Hambantota’s port is relatively isolated from Sri Lanka’s more developed areas. According to one optimistic projection , traffic leaving the port could surge from under 1,000 vehicles a year to nearly 25,000 vehicles by 2040. Much of that traffic would be destined for areas closer to Colombo. To service this growth, Sri Lanka’s road and rail networks would need to be considerably upgraded and expanded. Some of these supporting projects are underway.

The success of Kyaukpyu could also depend on the development of the China-Myanmar Economic corridor. The proposed multiphase project is designed to promote interstate connectivity between areas in southwest China and Myanmar. These connections, including oil and gas pipelines, could also help to expedite trade from Europe and the Middle East to inland China by allowing it to enter the continent at Kyaukpyu rather than at Chinese ports in the South China Sea, where goods must travel overland for hundreds of miles before reaching inland provinces like Yunnan.

To be sure, connectivity gaps are not limited to Chinese port investments. Chabahar Port in Iran faces similar challenges, particularly its isolation from Iran’s railway network. State-backed companies in India have recently announced investments aimed at addressing this shortcoming.

Sometimes better investments do not offer as many political benefits.

Political Currents and Changing Tides

These cases highlight how the domestic political incentives for port construction do not always align with the economic merits. Hambantota, Gwadar, and Kyaukpyu are all advertised as engines of development for historically underdeveloped areas. As rural locations, they are less connected to broader transportation networks. In other words, the appeal of building a “game-changing” port in an undeveloped area almost always brings with it broader connectivity challenges, most of which are not captured in the cost of the port itself.

Sometimes better investments do not offer as many political benefits. Improving an existing port’s operations is often a cost-effective way to increase trade competitiveness, but technical and management enhancements do not generate the same excitement as ribbon-cutting and ground-breaking ceremonies. The duration of many infrastructure projects also magnifies the political incentives for starting projects. Successful projects can take years to complete and even longer before they become profitable. As such, officials who reap the political benefits of the new projects are often unaccountable for the project’s long-term performance.

Maritime trade is a fluid business. Shipping lanes are slow to change, but they are not immune to revision. As the Arctic warms, for example, northern sea lanes are remaining open for longer each year. There are also ambitious plans, like the Kra Canal, that could impact future shipping lanes, albeit not as dramatically as the Suez and Panama Canals did in the past. Individual ports may rise and fall, based not only on their location but also on their ability to compete and provide services. As the new ports examined in this article mature, they will need to overcome connectivity and services challenges or they will remain constrained. Further research is needed, not only to better understand each port’s characteristics, but also their related connectivity projects.

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Five years on from the launch of the Belt and Road Initiative, the second part of a report on the implications for Turkey of China's economic masterplan focuses on the likely long-term geopolitical transformation of the wider Eurasian region.

Turkey: A vital BRI Europe-Asia crossing point or a bridge too far?

China's Belt and Road Initiative (BRI) presents a number of opportunities for Turkey, many of which will have wide-ranging implications for the country's economy and geopolitical standing. Naturally enough, many within its business, academic and governmental sectors have strong views as to its possible benefits and likely pitfalls.

With a particular emphasis on the broader geopolitical issues that may influence Turkey's view of China's mega-project, a number of senior Turkish figures were asked to give their assessment of the current state of play. Perhaps unsurprisingly, given the unprecedented scale and nature of the BRI, it was clear, overall, that no real consensus has yet emerged.

Stabilising Influence

While the BRI's primary effect will be economic, the shift in trading routes and patterns it is set to cause will, inevitably, lead to changes in political relationships across Eurasia. While it is a long-held maxim that improved trade and improved stability go hand-in-hand, not everyone in Turkey seems wholly convinced.

There is, however, a widely shared belief that the BRI will transform far more than just trade arrangements. One Turkish businessman who is convinced of that is Şahin Saylik, General Manager of Kırpart, a leading automotive-parts company with operations in China. Seeing its implications as potentially very broad indeed, he said: "The BRI will definitely have a major geopolitical effect in terms of bringing peace to unstable regions, for instance.

"Good trading partnerships will force countries to have more understanding of, and be more sympathetic with, the region's political relationships. Stabilisation and security are must-haves if the project is to succeed.

"It is a gigantic undertaking that involves considerable economic, cultural, social and political development, as well as stabilisation and peace in the region. As a geographically important player, Turkey can only benefit from the positives the project offers."

Turgut Kerem Tuncel, a senior analyst at Ankara's Center for Eurasian Studies, is another who believes the BRI will be a stabilising influence throughout the Eurasian region, saying: "Potentially, the BRI will have a great geopolitical effect on the region. Liberal internationalist experts view the BRI as a driver for peace, arguing that enhanced trade ties among countries will inevitably aid stability. Certainly, there is some truth to that view."

Iran's Importance

One Eurasian nation that could particularly benefit from an increase in regional trade and stability is Iran. It is currently facing a renewal of US sanctions after the Trump administration pulled out of the Joint Comprehensive Plan of Action (JCPOA) nuclear agreement between Tehran and the US, UK, France, Germany, China and Russia. Coupled with the recent anti-Iranian rhetoric from Israel and the US, the move may mean the BRI takes on an even greater significance within its borders.

Highlighting the importance of Iran to Turkey, Salih Işik Bora, an International Trade Analyst at the Center for Eurasian Studies, said: "Turkey has many good reasons to proactively address the geopolitical challenges that could negatively impact on the BRI. Perhaps the most important is the advancement of collaboration with Iran, as the two countries will together form a critical juncture between Central Asia and Europe.

"Tehran is currently moving towards wider integration with the world economy. A major indicator of this trend is Iran's improving ties with Europe, as illustrated by French oil company Total's recent signing of a $4 billion treaty with Tehran. At the same time, Beijing is clearly interested in enrolling Iran in the BRI, as was shown by Xi Jinping's 2016 announcement that China wants to increase its bilateral trade with the country to $600 billon over the next 10 years."

Pointing out that even the end of the JCPOA nuclear agreement and the threat of fresh sanctions may not halt Iran's progress towards greater international economic integration, he added: "Even the American business community seems eager to lift the current sanctions. Boeing, for instance, recently signed a $3 billion deal to supply civilian aircraft to Iran."

Afghanistan: A possible BRI transit hub.

Highlighting Afghanistan as another potential beneficiary, Selçuk Çolakoğlu, Professor of International Relations at Ankara's Turkish Center for Asia Pacific Studies, said: "In order to be successful, the BRI is reliant on a wide range of co-operative efforts across a host of different sectors, from infrastructure to developmental aid. This is hugely significant, given that the BRI projects put forward by other countries have largely concentrated just on developing their transportation infrastructure and improving their integration into the world market through trade liberalisation.

"All these efforts aim to build up regional integration through economic and political co-operation. Afghanistan, as one of the heartlands of Asia, could theoretically become a key hub for transit transportation, regional trade and economic and political co-operation with the help of BRI-related initiatives."

Increased Competition

While improved trade may enhance peace and security, a freer flow of goods and services is not without its potential downside. Addressing this particular issue, Tuncel said: "The BRI may well trigger competition among countries. Eurasian nations could compete with one another to try to ensure that various trade routes pass through their own territories as a way of elevating their own geopolitical significance and maximising their own economic benefits. Nevertheless, as long as the competition remains healthy, it may also facilitate the overall modernisation of the region.

"There may also be competition among the major powers. For example, while the EU seems to have a broadly positive view of the BRI, some indicators show the US is somewhat more cynical.

"Russia's view of the BRI is also worth considering. While the Kremlin wants to create a closed regional economic zone, with the Eurasian Economic Union evolving into a political bloc, the success of the BRI depends on openness. As China is likely to become a dominant force in the region, that may cause problems in its future relationship with Russia."

Looking East

As the EU, the world's largest single market, is on its doorstep, Turkey has long been reliant on exporting its goods to Europe. Its attempts to actually join the bloc have been fruitless and, given the current political climate, look set to remain just that.

For some, though, the BRI gives the country an opportunity to turn away from the west and seek new trading relationships in the east. Clearly an advocate of this particular strategy, Nicol Brodie, an analyst with the Australian National University in Canberra, said: "The BRI is an opportunity for Turkey's President Erdoğan and his government to reduce its economic dependence on the European economies and hedge against deteriorating relations with the United States and NATO. It provides Turkey with trade, foreign direct investment and is a vehicle through which it can establish its economic and cultural footprint across central Asia.

"Turkey's relations with the United States, its long-term security partner, and Germany, its major economic partner, have been frosty for some time. The BRI, though, provides Turkey with a way to explore alternatives to these existing economic and strategic partnerships and simultaneously helps China create its own economic architecture.

"Crucially, it allows both nations to strengthen their relationship without entering into direct opposition with the US. It would be difficult, for example, to find specific reasons to support any claim that the Sino-Turkish relationship undermines the latter's NATO membership."

Tuncel also saw distinct benefits in Turkey potentially pivoting from the west to the east, saying: "Obviously, Turkey's deteriorating relations with the US and the EU, which dashed its hopes of accession to the EU, has generated additional interest in the BRI.

Russia: Likely to blow cold on BRI expansion.

"In Turkey, a visible section of the intelligentsia and political class has voiced support for Turkey's looking east at the expense of its historical inclination attachment to the west. For them, deeper relations with China, Iran and Russia are needed to counter the west's perceived hostility.

"The BRI is a potential lever that can allow Ankara to become the ultimate kingmaker in the Eurasian arena, while increasing its economic and political sphere of influence. If Beijing and Ankara can reach a suitable accommodation, Turkey may well become the backbone of the BRI."

Problems for the West

As Turkey increases its focus on its Eurasian connections, the relevance of western institutions is likely to decrease. This may create difficulties for the US and NATO, given Turkey's key position in relation to the Middle East, the Balkans and the Black Sea states.

Focusing on this particular problem for the west, Brodie said: "This will inevitably put the United States and its NATO partners in a difficult position. While they cannot oppose a trade relationship, they will still be worried about Turkey's attempts to slowly decouple itself from the west's economic and strategic embrace.

"Overall, Turkey's engagement with the BRI and its growing relationship with China is likely to become one of the more permanent fixtures of Turkish politics. The BRI, after all, is compatible with Turkey's defence and economic integration with NATO and Europe."

Complacency Concerns

While many in Turkey are optimistic about the opportunities the BRI presents, there is a growing feeling that this very confidence may present risks, with Turks assuming that the country's advantageous geographic position ensures its advantageous participation. Sounding a warning note in this regard, Tuncel said: "Over-confidence among the majority of Turkish experts and policy makers over the country's geostrategic position is a worry. While it is true that Turkey is in a strategically very important location, this only becomes meaningful if the relevant economic and infrastructural projects are actually implemented.

At the crossroads: Will Turkey pivot East or West in the new world order?

"This requires deeds rather than bombastic rhetoric. In brief, over-confidence, idleness and the possibility of falling behind with infrastructure modernisation seem to be the major obstacles that have to be overcome to ensure that Turkey can both be fully engaged with the BRI and subsequently benefit from its involvement."

George Dearsley, Special Correspondent, Ankara

For further analysis of Turkey's likely role within the BRI, see part one of this report: "While Concerns Linger, Turkey's BRI Commitment Remains Steadfast", 14 May 2018.

中國外經貿企業服務網

習近平總書記在2013年訪問中亞四國和東盟期間，先後提出了"絲綢之路經濟帶"和"海上絲綢之路"的戰略構想，並在2013年12月召開的黨的十八屆三中全會上通過的《中共中央關於全面深化改革若干重大問題的決定》關於"構建開放型經濟新體制"中進一步明確提出："加快同周邊國家和區域基礎設施互聯互通建設，推進絲綢之路經濟帶、海上絲綢之路建設，形成全方位開放新格局。""一帶一路"倡議的提出，是時代的要求，是把快速發展的中國經濟同沿線國家利益結合起來，利用中國自身發展優勢實現自身發展的同時，帶動其他國家乃至世界經濟發展的偉大創舉。

亞洲開發銀行(簡稱"亞開行")在2014年發佈的《亞洲發展展望報告》裡面指出，雖然亞洲區域的經濟增長速度有所放緩，但其仍然是全球主要國家中增速最快的區域，尤其是該區域主要經濟體正在執行的改革措施將繼續推動該區域領銜全球經濟增長，因此亞洲區域是實行"一帶一路"倡議的重點。

經濟的快速發展需要相應的配套設施，然而目前亞洲國家在基礎設施上依然存在巨大的不足。根據亞開行的預測，2010-2020年亞太地區對基礎設施的需求高達8萬億美元(見表1)。基礎設施的建設是支持經濟發展的重要保障，也是實現"一帶一路"倡議互聯互通的基本要求，而基礎設施的建設需要巨額資金的支持。

"一帶一路"倡議實施過程中的資金需求主要集中在以下幾個領域：一是通信、供水和環衛設施等基礎設施領域。沿線的中亞、東南亞等國家的基礎設施較為落後，對基礎設施的新增需求強烈。二是交通、港口等跨境通道領域。"一帶一路"的暢通需要提升鐵路、公路、管道等通道能力。三是能源、資源領域。"一帶一路"跨越的地區能源和資源豐富，特別是中亞、俄羅斯等地區蘊藏著豐富的礦產、石油、天然氣等資源，開發潛力巨大。"一帶一路"沿線國家雖然經濟發展迅速，但是差異較大，一些國家市場制度不完善，在這些國家進行基礎設施建設，存在資金需求量大，投資回報期長而且未來收益不確定的問題。與此同時，"一帶一路"沿線國家間目前跨境金融合作的層次較低，大部分的貸款集中在油氣資源開發，管道運輸等能源領域，其他領域未能從中受益。因此，為了順利推進"一帶一路"倡議的實施，為"一帶一路"沿線特別是亞洲區域的基礎設施建設提供資金支持，我們需要對融資進行總體的規劃，構建以絲路基金為引導，以亞洲基礎設施投資銀行等國際開發性金融機構為重要支撐，以國內政策性銀行、國內商業銀行以及民間投資機構為主要基礎的多元聯動的融資機制。

充分發揮絲路基金的引導作用

2014年11月，在加強互聯互通夥伴關係對話會上，習近平總書記發表了《聯通引領發展夥伴聚焦合作》的重要講話：中國將出資400億美元成立絲路基金。絲路基金成立的初衷是為"一帶一路"服務，主要使命是為"一帶一路"沿線國家提供基礎設施建設、資源開發、產業合作等有關項目提供投融資支持。絲路基金是一個開放的平台，它的包容性和多元化可以為"一帶一路"倡議實施提供豐富的融資渠道和方式，可以吸引有資金實力、有知識和管理經驗的銀行和投資機構參與，多方彙聚就可以優勢互補，博採眾長。絲路基金的定位是中長期的開發投資基金，注重合作項目，更注重中長期的效益和回報。不同於以往股權投資7~10年的投資週期，絲路基金的投資期限能夠到15年或者更長的時間，可以滿足一些發展中國家中長期的基礎設施建設的資金需求。絲路基金首期資本金100億美元(首期注入的資本為美元)，這主要是便於國內外投資者通過市場化方式加入進來，外匯儲備通過其投資平台出資65億美元，中國投資有限公司、中國進出口銀行、國家開發銀行亦分別出資15億、15億和5億美元。隨著"一帶一路"倡議的不斷推進，相信會有更多的資本進入。

2015年4月20日，絲路基金、三峽集團及巴基斯坦私營電力和基礎設施委員會在伊斯蘭堡共同簽署了《關於聯合開發巴基斯坦水電項目的諒解合作備忘錄》(以下簡稱《諒解備忘錄》)，該項目是絲路基金註冊成立後投資的首個項目。根據《諒解備忘錄》，絲路基金將投資入股由三峽集團控股的三峽南亞公司，為巴基斯坦清潔能源開發、包括該公司的首個水電項目——吉拉姆河卡洛特水電項目提供資金支持。電力行業是巴基斯坦政府未來十年發展規劃中優先支持的投資領域，絲路基金首個對外投資項目落地巴基斯坦的電力項目，標誌著絲路基金開展實質性投資運作邁出了重要一步，而"中巴經濟走廊"建設是"一帶一路"建設的旗艦，表明絲路基金服務"一帶一路"建設的使命。從項目運營管理模式來看，卡洛特水電站計劃採用"建設—經營—轉讓"(BOT)模式運作，於2015年底開工建設，2020年投入運營，運營期30年，到期後無償轉讓給巴基斯坦政府；從項目融資方式來看，絲路基金投資卡洛特水電站，採取的是股權加債權的方式：一是投資三峽南亞公司部分股權，為項目提供資本金支持。在該項目中，絲路基金和世界銀行下屬的國際金融公司同為三峽南亞公司股東；二是由中國進出口銀行牽頭並與國家開發銀行、國際金融公司組成銀團，向項目提供貸款資金支持；從控制風險方面來看，通過股權加債權的方式，一方面可以通過股權鎖定長期投資的高額回報，獲取一定股份，參與公司治理，提高投資收益的確定性，另一方面可以通過債權獲取優先清償權，有助於控制風險。絲路基金不是援助性的，在一定程度上也是逐利的，因此絲路基金在服務"一帶一路"建設的同時要評估項目的風險，平衡好風險和收益之間的關係……

綜上所述，助力"一帶一路"倡議實施的各個資金提供機構之間不是各自為戰、相互競爭的關係，而是相互合作、協同發展的關係。為了推進項目融資的有效進行，我們要形成多方聯動的融資機制。"一帶一路"建設中的一般項目都需要債權融資和股權融資相配合，在充分發揮絲路基金的引導作用的基礎上，由絲路基金聯合其他投資機構比如亞投行共同投資股權，中投也可以附加參與一部分股權投資，啟動一些本來因缺少資本金而難於獲得貸款的項目，然後由中國進出口銀行和國家開發銀行跟進發放貸款，由商業銀行為項目參與企業提供銀行業務，積極引進民間資本參與項目建設，多方聯動，共同促進項目實施，有力的推動"一帶一路"倡議的實施。

請按此閱覽原文。

By PwC

Foreword

Infrastructure development is crucial to improving connectivity and driving sustainable growth in ASEAN. It is important to identify the changing needs of each of these countries in order to leverage future opportunities and trends in infrastructure investments in the region.

This report is the second in a three-part Infrastructure Series. In the first report, Understanding infrastructure opportunities in ASEAN (2017), we discuss the existence of a widening infrastructure gap in the region, highlight the potential difficulties faced by countries in mobilising infrastructure investments, and examine measures that could potentially address these challenges. In addition, we introduce the future drivers that we believe will further increase infrastructure spending in the region.

In this second report, we take a closer look at how the identified drivers are shaping the pipeline of greenfield infrastructure projects in each ASEAN country. We also assess how the Public Private Partnership (PPP) project pipelines of these countries are shaping up in light of these driving forces.

The subsequent and final report of our Infrastructure Series, which will be published later in 2018, will cover infrastructure funding and financing, including developments in the funding landscape and alternative sources of financing.

We hope that you find our Infrastructure Series a useful resource that addresses some of the key issues that we as infrastructure practitioners grapple with. If you would like to discuss any of the issues raised here, please do get in touch with us.

Chapter 1: Infrastructure in ASEAN

All economies in ASEAN have been focusing their efforts on increasing both private and public sector investments in infrastructure. However, the region’s rapid growth has outpaced its infrastructure development, which has resulted in a huge need for infrastructure investments. The Asian Development Bank (ADB) estimated that ASEAN countries will require US$2.8 trillion in infrastructure investments from 2016 to 2030…

Transport

Asia Pacific is forecast to become the largest transport infrastructure market in the world with investments expected to increase from US$669 billion in 2016 to nearly US$1.2 trillion in 2025. Cumulatively, investments in transport infrastructure in Asia Pacific are expected to be almost US$9.0 trillion. This is due to the region’s diverse and difficult geography, rapid economic growth and increasing urbanisation, all of which culminates in an acute need to develop transport infrastructure and services.

Governments get ambitious
Governments in the region have identified transport infrastructure to be of strategic importance for their economic development and trade competitiveness. Given the rapid urbanisation and increasing mobility that many ASEAN countries are seeing, demand for transport infrastructure and more efficient transport networks is on the rise. This has placed pressure on governments to renew a commitment to transport infrastructure spending as part of their national development strategies.

Historically, there has been a focus on roads and bridges. Presently, 65% of projects under construction are roads and bridges. There were a total of 270 road and bridge projects in the past, accounting for more than 52% of the total transport projects. This emphasis is set to continue — of the total number of transport projects in the pipeline, 46% are roads and bridges, and 30% are rail.

Among the ASEAN countries, Indonesia, Vietnam and Philippines have historically had the largest share of transport infrastructure projects. In fact, Vietnam and Indonesia share the top spot with 97 projects each.

In Vietnam, road is the dominant mode of freight transport supporting the country’s development as a regional manufacturing hub. Statistics show that roads served about 77% of all freight transport and 94% of all passengers transported in 2016.

These countries intend to continue their emphasis on transport, as observed from their development plans. Thailand, too, has unveiled infrastructure plans that place emphasis on transport infrastructure.

Joining hands, regionally and cross-regionally
While many ASEAN countries are looking inward at their infrastructure needs, they remain acutely aware of their place in the wider global supply chain. Shifts in global economic power and trade competitiveness are driving regional cooperation and integration initiatives. Global and regional megaprojects arising from this trend, such as China’s BRI and the initiatives announced for the Greater Mekong Subregion (GMS), will boost infrastructure spending, particularly in ASEAN.

Rail attracts attention
With increasing urbanisation and mobility, ASEAN is seeing an increasing emphasis on rail projects, given their efficiencies vis-à-vis road transport. The cumulative railway spending between 2016 and 2025 in the Asia Pacific is expected to amount to US$2.3 trillion — the highest of all regions. Specifically, total investments in subway construction in Asia are projected to reach US$230 billion in the next 15 years…

Energy

The rapid economic and population growth of ASEAN is leading to a huge demand for energy — demand that is estimated to grow at a compound annual growth rate (CAGR) of 4% per year from 2014 to 2025.

In other words, the region has to be ready to handle a doubling of electricity demand between 2014 and 2025. Governments are responding accordingly by continuing their focus on power projects with a new focus on renewables.

Focusing on renewables

Climate change and resource scarcity are giving rise to concerns over energy security, which is driving the need for the development of sustainable infrastructure. One sector with high potential for ASEAN governments is renewable power generation, especially since many countries are rich in renewable energy sources.

In order to tap into this renewable energy potential and move towards more sustainable forms of energy, ASEAN is aiming for 23% of its total primary energy supply (TPES) to come from renewable energy by 2025.

This target is a significant, and ambitious, increase — in 2014, renewables only contributed to 9.4% of TPES. To achieve this, each ASEAN government has set out their own renewable energy targets.

In addition to renewable capacity addition targets, the governments in the region have also implemented various policies and regulations to stimulate the development of renewable energy.

In the past, the bulk of the renewable energy generated in ASEAN has come from hydropower projects. These were mainly found in Lao PDR and Vietnam. Geothermal and wind come next, in terms of number of projects, where most of the developments were found in Indonesia, Philippines, Thailand and Vietnam.

However, in the future and as illustrated in each country’s renewable energy targets, we expect an increasing emphasis on solar, wind and biomass power projects. Hydro still leads in the region, but it is worthwhile noting that this sub-sector is primarily led by Lao PDR. The country intends to leverage its hydro potential to transform itself into the “battery of Asia” and export electricity to neighbouring energy-deficit countries….

Chapter 4: What’s next?

The drivers influencing the pipeline of infrastructure projects in ASEAN are rapid economic growth and urbanisation; increasing need for efficient mobility; trade competitiveness; climate change and sustainability; and geopolitics. The influence of these drivers, or a combination of them, has resulted in various initiatives such as:

• Ambitious infrastructure strategic plans and targets announced by governments in ASEAN;

• regional and cross-regional initiatives that aim to integrate and improve connectivity within the region while influencing the geopolitical environment; and

• the push for clean energy by establishing an enabling policy environment and setting aggressive clean energy capacity targets.

This has translated into a strong pipeline of infrastructure projects, particularly in the transport and energy sectors. In transport, we see a continuing shift to rail-based transport over roads given the former’s advantages in transporting people more efficiently in terms of travel time, land take and pollution. In energy, there is clear and significant shift to all forms of renewable energy in a bid to address current and future power generation gaps in the region.

To achieve their ambitious infrastructure investment targets, governments in the region are actively looking to leverage PPPs to mobilise private capital and expertise. Most of the countries in the region have, or intend to, establish a strong PPP ecosystem and this has translated into a long pipeline of PPP projects. We would, however, like to highlight that not all of the projects in the pipeline are 'investor ready' and can be brought to the market in the short term. In ASEAN, there has historically been a tendency for governments to bring projects to the market too early before proper preparation has been done. While this is understandable, given the developer and investor appetite for more projects and the availability of financing, in the long run, it actually slows down the project procurement timeline and governments risk losing credibility in the marketplace.

That said, to overcome these issues, we hope that ASEAN countries will adopt best practices in infrastructure planning and PPP project preparation processes as explained in our first report of this Infrastructure Series, Understanding infrastructure opportunities in ASEAN (2017). A robust planning and preparation process will ensure that the pipeline of projects is bankable. This will go a long way in building confidence with potential investors, and, when coupled with a strong policy environment, will help in attracting infrastructure investments.

Please click to read full report.

Despite the two-year delay occasioned by land-acquisition issues, services on the China-funded Jakarta-Bandung High-Speed Rail Line are set to begin within three years, representing a new high-water mark for Beijing-Jakarta relations.

Express delivery could see Indonesia's first high-speed rail link calling at all stations by 2021.

The BRI-backed Jakarta-Bandung high-speed rail line is said to be back on track, with its contractors confident it will now enter operation in 2021. Although this is a full two years behind the completion date envisaged when the project was first given the go-ahead in 2015, it does mean that progress – long-stalled over land-ownership issues – is finally being made.

Once completed, the line will be 150km long and have the capacity to handle trains travelling at up to 250km/h. Initially, it is expected to have an average daily passenger flow of some 44,000, a figure expected to climb dramatically. Its most significant benefit, though, is the cut in transit time it offers for journeys between two of the country's primary hubs, with the present five-hour duration falling to just 36 minutes.

Summing up the current state-of-play on the project, Tumiyana Tumiyana, the President Director of Wijaya Karya (Wika) – the state-owned Indonesian construction company that is the local partner on the project – said: "If work on a 150km high-speed rail project occasionally experiences a few problems, that's only to be expected. Today, the level of physical construction stands at 65.1%, with 81.7% of the overall land clearance also completed.

"In fact, it's all starting to come together rather quickly now, with significant progress having been made at 22 key construction sites along the route. We are now confident that work on the line will finish by early 2021, with the service then starting to run once three months of trials have been completed."

Wika, the company Tumiyana represents, is part of Kereta Cepat Indonesia China (KCIC), the Chinese-Indonesian consortium responsible for developing the project, the country's first high-speed rail line, in association with the China Railway International Corporation (CRIC). The optimism shown by such a senior figure within the cross-country partnership will, no doubt, come as some reassurance to many of the project's stakeholders, with several of them having become notably jittery over the delays and uncertainty that has dogged the development of the line.

Given the scale of the project, it is somewhat unusual that its two-year overrun is more down to land-acquisition issues than the somewhat more common problem of nailing down the finance. The funding for the project, indeed, has been in place almost since the outset.

In line with this, earlier this year, Wika received US$770 million (Rp 11.1 trillion) from the China Development Bank, the latest tranche of the $5.5 billion China has allocated to the project. The funding comes within the remit of the BRI – the Belt and Road Initiative, China's ambitious international infrastructure development and trade facilitation programme.

Despite some concern on the part of local opposition groups that Indonesia will be permanently in hock to China and unable to meet its repayment obligations, Tumiyana is confident the financial targets are realistic. Assessing the profit potential of the line and the agreed repayment terms, he said: "Firstly, you have to remember that we have been given a 40-year soft loan at a very cheap rate. Secondly, as part of the overall plan, the consortium will develop the property in the immediate vicinity of the railway stations, a strategy that, we believe, will generate up to Rp362 trillion in revenue over the next 40 years."

The city of Bandung: Set to get four-and-a-half hours closer to Jakarta, the national capital.

Despite Tumiyana's optimism, the project's progress may yet be far from smooth, with a number of land-acquisition issues remaining unresolved. As of May this year, only 73% of the designated land had been successfully acquired, with just 60% of that officially allocated to the developer.

Murkier still, five companies whose premises need to be acquired and demolished to make the proposed route viable, have initiated legal action against the consortium, demanding total compensation of $141 million. Of these actions, three have already been granted leave to proceed to court by state legislators.

In light of these actions, it is believed that that consortium is considering a number of changes, which would see the proposed rail line diverted away from the contested properties. Despite this apparent late-in-the day rethink, the consortium has officially stated that this will not push completion beyond the proposed 2021 deadline.

Despite these local difficulties, it is believed that both China and Indonesia remain firmly committed to making the completion of the line a reality. A similar optimism also characterises many of the other BRI-related infrastructure projects under way in Indonesia.

Since 2015, when China first committed to developing the Jakarta-Bandung line, mainland investment in Indonesia has more than doubled and seems set to continue to grow. As recently as April this year, China agreed an additional $23.3 billion in funding for five further Indonesian infrastructure projects.

Indonesia, however, is keen not to appear wholly dependent on China for its programme of economic renewal. This has seen it partner with Japan on the 730km long Jakarta-Surabaya High-Speed Rail Link, a route five times the length of the China-backed Jakarta-Bandung line.

Overall, though, the closer links wrought between China and Indonesia by the scale and scope of the BRI have clearly benefitted both countries. For Indonesia, the advantages are obvious – in order to continue to develop economically it has no choice but to improve connectivity both within the country and with its neighbours and the high-value importers in the more developed economies. China picking up the tab for such an undertaking was clearly an opportunity the country could not turn down.

For China, the benefits of its BRI partnership with Indonesia are both multifold and slightly more nebulous. Most obviously, this closer collaboration gives China easier access to Indonesia's strategically significant ports and marine facilities. At the same time, it also gives China a direct route into Indonesia's relatively-young, newly-affluent consumer base. With a population in excess of 261 million, Indonesia has more than twice as many consumers as any other country in the ASEAN bloc, making it a priority target for China's export-oriented business sector.

Less obviously, the improved working relationship allows China to develop an affinity with one of the world's leading Muslim nations, a major bridge-building exercise for a country that is often seen as at odds with its own domestic Muslim population. It also sees China establish a distinct alliance with a country that is fast emerging as a force in its own right within the region. With its focus on soft-power, China is understandably keen to nurture as many influential friends within the wider Asia-Pacific region as it possibly can.

Marilyn Balcita, Special Correspondent, Jakarta

By Michael J. Green, Senior Vice President for Asia and Japan Chair at the Center for Strategic and International Studies (CSIS)

China unveiled the concept for the Twenty-First Century Maritime Silk Road (MSR) in 2013 as a development strategy to boost infrastructure connectivity throughout Southeast Asia, Oceania, the Indian Ocean, and East Africa. The MSR is the maritime complement to the Silk Road Economic Belt, which focuses on infrastructure development across Central Asia. Together these initiatives form the One Belt One Road (OBOR) initiative designed to enhance China’s influence across Asia.

There is a shortage of infrastructure investment to meet the needs of developing nations across the Indo-Asia-Pacific region and most nations have welcomed the opportunity to bid for Chinese funding. At the same time, there are growing questions about the economic viability and the geopolitical intentions behind China’s proposals. Thus far MSR initiatives have mainly been concentrated in the littoral states of the Indo-Pacific region, especially port-development projects, which is raising questions about whether these investments are economic or military in nature. These large-scale investments are also structured in ways that invite questions about the potential for China to exert undo leverage over the domestic and foreign policies of heavily indebted recipient countries.

To shed light on some of these themes, CSIS has commissioned seven experts to unpack the economic and geostrategic implications of China’s infrastructure development across the Indo-Pacific region under the MSR. Their research is presented in this volume. The essays begin with analysis of four infrastructure projects, three by China under MSR and one by India as a counter to MSR. These are: Kyaukpyu (Myanmar), Hambantota (Sri Lanka), Gwadar (Pakistan), and Chabahar (Iran):

• Kyaukpyu: Greg Poling explains the economic and strategic rationale behind China’s investments in Kyaukpyu, a coastal town along the Bay of Bengal in Myanmar’s western-most state of Rakhine. China recently won contracts to develop a deep-sea port at Kyaukpyu and an industrial area in a special economic zone (SEZ) nearby. Kyaukpyu is also the terminus for an oil pipeline and a parallel natural gas pipeline running to Kunming, capital of southwestern China’s Yunnan Province. Those projects reflect a strategic effort by Beijing to reduce its reliance on oil and gas imports through the Strait of Malacca, and a deep-sea port at Kyaukpyu could similarly help China in its drive to develop its inland provinces. Poling references regional concerns about the potential that China would leverage a port at Kyaukpyu for military purposes but concludes that at present the overriding fear within Myanmar is China’s potential economic leverage via debt financing.

• Hambantota: Jonathan Hillman examines China’s development of the Hambantota port in Sri Lanka and questions the economic rationale of this project given existing capacity and expansion plans at Colombo port, fueling concerns that Hambantota could become a Chinese naval facility. This case also highlights the potential risks of becoming a debt trap as Sri Lanka handed the port over to China in December 2017 with a controlling equity stake and a 99-year lease—eerily similar to the imperial strategies Britain imposed on Qing China with Hong Kong in the Nineteenth Century. Hillman suggests the Hambantota case reveals the need for recipient countries to tie infrastructure projects to larger development strategies in order to better monitor debt levels, and for the international community to expand alternatives to Chinese infrastructure financing.

• Gwadar: Gurmeet Kanwal highlights the development of Gwadar port as a key element in the larger China-Pakistan Economic Corridor (CPEC) initiative. Though CPEC is branded as a symbol of strong bilateral ties between China and Pakistan, Kanwal argues that both sides have misgivings about the project, including China’s concern about the safety of its workers and fears in Pakistan about increased indebtedness resulting from the project, that could increase tensions. Kanwal also addresses the security implications of China’s potential naval access to Gwadar as a gateway to the Indo-Pacific, and concludes by examining the potential from the revived quadrilateral framework of security dialogue and cooperation among India, Japan, Australia, and the United States as a way to counter China’s strategic outreach.

• Chabahar: Harsh Pant notes that China is not the only country playing the great game through infrastructure investment. India’s efforts to help develop Iran’s Chabahar Port reflect Delhi’s own ambitions as a driver of infrastructure development and improved regional connectivity, particularly with Afghanistan. Close to the Chinese-backed, Pakistani port of Gwadar, the Chabahar project is also seen as a strategic play to limit the influence China seeks to gain and wield through its Belt and Road Initiative and MSR. Pant concludes by identifying complications in India’s strategy stemming from Iran’s openness to Chinese and Pakistani participation in the development of Chabahar.

These four infrastructure case studies are followed by two essays addressing the broader economic and military implications of China’s MSR initiative:

• Economic Implications: Matthew Funaiole and Jonathan Hillman begin their chapter by framing the larger economic significance of the Indo-Pacific region, noting for example that each of the 10 busiest container ports in the world are along the shores of either the Pacific or the Indian Ocean, and more than half of the world’s maritime trade in petroleum transits the Indian Ocean alone. In order to begin addressing whether China’s infrastructure investments serve economic or strategic purposes—or both—the authors introduce three criteria for assessing the economic viability of infrastructure development projects: proximity to shipping lanes; proximity to existing ports; and hinterland connectivity, or the degree to which port projects are connected to larger development strategies inland (though some ports can arguably serve meaningful economic purposes as hubs for cargo transshipment). In their view, all three of the Chinese infrastructure projects examined in this volume are somewhat misaligned with economic objectives, particularly with respect to the third criterion of connectivity.

• Military Implications: Zack Cooper posits that China’s increased military presence in the Indian Ocean should not come as a surprise. China is following in the traditional path of other rising powers; it is expanding its military operations to match its interests abroad. The Chinese economy is highly reliant on trade routes that pass through the Indian Ocean, which serves as a vital pathway, particularly for energy supplies, and it is therefore natural for the Chinese government to seek to protect its interests along these sea lines of communication. In his view, the security implications of China’s push into the Indian Ocean are mixed. In peacetime, these efforts will certainly expand Chinese influence in the region, possibly through access to port facilities to refuel or resupply naval vessels and in terms of anti-piracy operations and familiarization with other regional militaries. At the same time, however, China’s Indian Ocean presence will likely create as many vulnerabilities as opportunities in terms of protecting trade routes, bases, and ships—particularly in wartime. Nevertheless, Beijing’s political, economic, and military influence is likely to expand in future years and will remain a concern for strategists focused on the Indian Ocean, which has long been seen by the United States and Australia as a critical transit point from the Pacific to the Middle East and critical for maritime defense in depth to manage any threats to the critical chokepoints of the Gulf of Hormuz and the Strait of Malacca. These concerns are increasingly on Japan’s radar and India has also grown concerned that China’s so-called “string of pearls” in the Indian Ocean would give Beijing new options to horizontally escalate beyond long-standing Sino-Indian competition in the Himalayas.

The series concludes by examining how the maritime democracies of the United States, Japan, India, and Australia might respond to the uncertainties posed by the MSR through the newly reconstituted “Quad.”

• Quad Response: Jesse Barker Gale and Andrew Shearer review the history of the Quadrilateral Security Dialogue, or “Quad,” which began when Australia, Japan, India, and the United States first came together to provide humanitarian assistance after the 2004 Indian Ocean tsunami. In subsequent years, the four governments failed to formalize the construct because of differences within each capital about China’s possible reaction. Fast-forward a decade, and the four countries have now reestablished the Quad in what the authors consider a response to China’s unexpected economic and military assertiveness in the region. They argue that with increasing convergence among the four maritime democracies on the need to coordinate on a broader strategy to ensure a free and open Indo-Pacific region, the “Quad 2.0” has potential to shape China’s strategy in a more benign direction, but remains underutilized and under-operationalized.

This study builds on prior work at CSIS on the geopolitics of the Indo-Pacific, including: the Asia Maritime Transparency Initiative; Reconnecting Asia; China Power; and  Countering Coercion in Maritime Asia. The idea for a focused examination of China’s Maritime Silk Road grew out of discussions with senior leadership on Japan’s National Security Council staff, who then provided some funding for a conference on the subject. As with our other research on maritime Asia, we have endeavored to integrate political, military, economic, and historical considerations. The analysis and prescriptions are entirely those of the authors and do not represent the official positions of any government in the region.

The overall conclusion is mixed. China’s MSR projects are neither purely military nor purely commercial. Moreover, China’s overall approach is probably evolving. It is our hope that this study will help the United States and like-minded states refine their own response to MSR—hedging or deterring where necessary, but also working to encourage a more transparent and economically viable approach from Beijing.

I am grateful to the authors for their expertise and careful work and to Nick Szechenyi for leading the project and pulling together the essays for this study.

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By Donovan Ferguson, James Mckenzie and Felicity Ng

Investors journeying along Belt and Road Initiative (BRI) countries will be wary of the operational, political and legal risks that come along on the route. To mitigate these risks, aside from the usual prudent contracting and investment structuring, investors should also be aware of their rights under the web of investment treaties which cover the route. However, knowing about the existence of investment treaties is only the first step.

Investors should familiarise themselves with the particular dimensions of substantive rights as expressed in the various Chinese Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties (MITs).  As at the time of writing, 61 BITs exist between China and BRI nations as well as several MITs. Of these BIT-contracting states, 49 are parties to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention), which provides for enforcement of arbitration awards.

While these treaties and the Washington Convention provide a robust source of potential investor protections, they must be understood and carefully planned for by BRI investors. There remain key differences between BITs with BRI countries. In this article, we detail some of these differences and some of the key considerations for making BRI investments.

Why do investment treaties matter?

BITs are international law instruments agreed between two states. MITs are treaties agreed between more than two states. BITs and MITs trace their history back to the post-Second World War era, originally created by developed countries to protect their investments in developing countries. Modern BITs and MITs aim to create a stable legal environment that fosters direct foreign investment. This is achieved by the “host state” (i.e. the state in which the investment is made) agreeing to provide certain guarantees and standards of protection to the investments of private foreign investors (i.e. those with the nationality of, or where they are a corporation the place of incorporation in, the “home state”).

A major innovation was introduced into investment treaties in the mid-1960s: arbitration mechanisms which give investors an effective remedy against unlawful actions of the host state, known as Investor State Dispute Settlement (ISDS). With the inclusion of ISDS mechanisms in investment treaties, corporate and individual investors can bring claims against governments for breaches of the substantive investor rights set out in those treaties. The ISDS process is independent from domestic legal systems, which means that BIT and MIT protections are a crucial bulwark against political and legal risks that BRI investors are likely to face in some of the high risk jurisdictions amongst the BRI countries. Importantly, investor rights and remedies through ISDS are often in excess of those that a BRI investor will enjoy under their BRI contract.

Notably, the usual dispute resolution method under Chinese investment treaties, arbitration submitted to the International Centre for Settlement of Investment Disputes (ICSID), allows investors to rely on simplified enforcement mechanisms under the Washington Convention. Host states that are party to the Washington Convention are required to enforce arbitral awards made under that Convention, making enforcement of awards an obligation under international law. While voluntary compliance with the Washington Convention is the norm rather than the rule, concerns surrounding reputation and creditworthiness are likely to continue to encourage government compliance with enforcement, particularly where the investments are made against a backdrop of a myriad of geo-political intricacies amongst BRI countries.

Investor protections covering the BRI route

Typically, the protections offered in BITs are similar to the protections offered in MITs, but the scope of guaranteed protection offered by each treaty will be set by its wording. Common forms of guaranteed protection include:

• compensation for expropriation or nationalisation of an investor’s assets by a state;

• fair and equitable treatment, which creates an obligation to provide a stable and predictable investment environment, to act transparently, and to act consistently;

• full protection and security, which provides a positive obligation to protect investment by the exercise of reasonable care;

• protection against discriminatory measures, e.g. taxes, fines, penalties, licences, permits, visa restrictions; and

• “umbrella clauses”. These clauses may incorporate contracts entered into between a host state and investors as BIT obligations.

Whilst China began its negotiation process for investment treaties in 1982, its treaty-making practice has varied over time and with its rise in economic power. While Chinese BITs generally contain all of the substantive protections outlined above, many of the earlier Chinese BITs entered into between the 1980s and the mid-1990s do not allow for umbrella clauses. Examples of BRI contracting states which have entered into such BITs are Indonesia, Laos, the Philippines, Saudi Arabia and Vietnam. Consistent with China’s earlier conservative approach, a further obstacle is posed by the limited scope of ISDS provisions in these treaties, as they only permit disputes relating to the compensation amount for expropriation. These treaties were concluded at a time when China was mainly acting as the host state, i.e. the recipient of foreign investments.

By contrast, China’s more recent BITs, especially those concluded post-2000s, have a different approach to investment protection and host state interests. BITs with BRI contracting states like Bosnia and Herzegovina, Iran, Myanmar, South Africa and Uzbekistan not only incorporate umbrella clauses but allow for ISDS in relation to any dispute relating to the investment. This shift in practice reflects China’s interest in protecting its own investors abroad. Given the increase in Chinese outbound investments and developments along the BRI countries, China may in the future renegotiate its earlier generation BITs to incorporate more liberal standards and to align with its policy orientation as exemplified in its more recent BITs.

To minimise risk exposure, investors should therefore carefully check the BITs and MITs between China and the BRI country where an investment is being made and their specific provisions. Investors should also check whether there are any treaties that are still in force and verify the BRI country’s history in dealing with ISDS claims.

How to make use of investment treaties?

The most important first hurdle for an investor seeking to make use of an investment treaty is to make sure that their investment falls within the definition of “investment” under a particular investment treaty. As of 2015, 32% of all ICSID arbitrations failed at the jurisdiction stage, as claimants did not qualify as an “investment” or being an “investor” under the relevant investment treaties.

The definition of investment has been subject to significant arbitral scrutiny. Notably, in Salini v Morocco (ICSID Case No Arb/00/04 (Decision on Jurisdiction, 23 July 2001)), the tribunal identified five criteria indicative of the existence of an investment under the Washington Convention, namely:

• a substantial commitment or contribution to the state;

• duration (i.e. a certain degree of longevity);

• assumption of risk;

• contribution to economic development; and

• regularity of profit and return.

Chinese BITs tend to adopt the commonly used asset-based definition of “investments” that is broad in scope, meaning that, apart from direct investments, this would include portfolio investments and intangible assets like intellectual property. However, there is often the requirement that such investments have to be made in accordance with the laws and regulations of the host state, which may narrow the scope of “investments”. This can be a challenge for BRI investors navigating through the interface between these multi-levelled requirements when structuring their investments so careful consideration should be given to fitting into the investment definitions before a project is commenced.

Conclusion

Investors should structure or restructure their investments to ensure that they qualify for ISDS protections. When structuring investments, investors ought to give similar weight to considerations regarding ISDS and falling within the scope of investment treaty protections, as they do the usual tax, funding and corporate governance considerations. BRI investors should therefore engage professional advisors at an early stage to structure their investments with this in mind, so that if a dispute does arise, they have the potential benefit of these additional protections.

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A critical component of one of China's most successful Belt and Road Initiative (BRI) projects – the China-Pakistan Economic Corridor (CPEC) – was inaugurated last month. This saw the high-speed, state of the art Pak-China Optical Fibre Cable (Pak-China OFC) network, which digitally connects Pakistan with China, officially enter service on 13 July.

Linking up the virtual Belt and Road: China boosts Pakistan's digital connectivity.

Jointly operated and maintained by the Special Communication Organisation of Pakistan and China Telecom, the two-year, US$44 million project saw a China-led consortium lay a total of 2,950km of cable, most of which was supplied by Shenzhen-headquartered Huawei Technologies. With the largest proportion of the cabling laid within China, the Pakistan segment runs for 822km and extends from Rawalpindi and into China via the Khunjerab border pass. At 4,733m above sea level, this makes it the world's highest cable-related project.

As part of the next phase, the cable will be extended through to Gwadar, the site of the CPEC's deep-water port, a major BRI project in its own right. For many of the CPEC stakeholders, the Gwadar link cannot be completed too soon.

At present, the port is suffering something of a logjam due to a series of ongoing customs delays triggered, in part at least, by the severing of a series of submarine cables in August last year, an incident that has made internet connectivity, throughout the whole country, intermittent at best. With a vast volume of time-sensitive produce – notably seafood – dispatched via the port on a daily basis, the delays are proving to be a logistical and cash-flow nightmare for the port's operators and for many of the export-oriented businesses that rely on it.

Thankfully, additional connectivity – beyond even that offered by the Pak-China OFC – is literally in the pipeline. Indeed, the best hope for the bandwidth-bereft port comes courtesy of PEACE – the Pakistan East Africa Cable Express – a new high-speed connection that will link Karachi and Gwadar by submarine cable to Djibouti and then on to a number of other African, Middle Eastern and European countries before its initial phase terminates in France. With this first section set to be completed before the end of next year, the project has now been under way for a little more than nine months.

Work on the submarine cabling is being headed by Huawei Marine, with the project co-funded by Tropic Science, a China-backed investment vehicle. Once operational, the network will be managed by Hong Kong's PCCW Global, with two Pakistan-based businesses – Cybernet and Jazz – handling local connectivity.

Initially stretching more than 6,200km, the PEACE network will eventually extend across 13,000km, with the aim of giving Pakistan world-class internet connectivity for the first time. Utilising high-calibre cabling, based on 200G DWDM technology, the network will ultimately deliver more than 60Tb in terms of capacity.

In a related development, last month China successfully launched two communications satellites on behalf of Pakistan. The Pakistan Remote Sensing Satellite 1 (PRSS 1), which formed the mission's primary payload, has been designed to boost the country's monitoring capabilities with regard to natural resources, environmental protection, disaster management, crop yield estimation and urban planning. It will also provide remote sensing information for the development and operation of the CPEC.

While it's the physical components of the BRI that frequently steal the headlines, the significance of its digital contribution should not be overlooked. It could be that these virtual networks play just as much a key role in delivering China's long-term trade objectives as any of the concrete and steel infrastructure installations that fall within the BRI's remit.

Geoff de Freitas, Special Correspondent, Islamabad

By Jonathan Hillman,  Director, Reconnecting Asia Project, Centre for Strategic and International Studies

The Dawn of a New Commercial Era?

For over two millennia, technology and politics have shaped trade across the Eurasian supercontinent. The compass and domesticated camels helped the “silk routes” emerge between 200 and 400 CE, and peaceful interactions between the Han and Hellenic empires allowed overland trade to flourish. A major shift occurred in the late fifteenth century, when the invention of large ocean-going vessels and new navigation methods made maritime trade more competitive. Mercantilism and competition among Europe’s colonial powers helped pull commerce to the coastlines. Since then, commerce between Asia and Europe has traveled primarily by sea.

Against this historical backdrop, new railway services between China and Europe have emerged rapidly. Just 10 years ago, regular direct freight services from China to Europe did not exist. Today, they connect roughly 35 Chinese cities with 34 European cities. Rail services are considerably cheaper than air and faster than sea, as Figure 1 illustrates, and could provide a compelling middle option for more goods in the coming years. Rail’s share of cargo by value is already growing, increasing 144 percent during the first half of 2017, as compared to the same period in 2016. A study commissioned by the International Union of Railways estimates that China-Europe rail services could double their share of trade by volume over the next decade….

The main challenge in squaring all these factors is that despite the attention they receive, there is little reliable and centralized information about these new services. Frequency of China-Europe rail services, cargo volume, cargo rates, and other basic information is hard to find, especially compared to maritime and air freight data. Many of these shortcomings stem from the newness of these routes, the complexity inherent in moving goods across many borders, and the resulting disaggregation of data. Data could improve in the coming years, but there are also incentives for obscuring the information. These trains carry not only commercial goods but also political ambitions.

Drawing from interviews with 34 stakeholders, this report contributes to filling that gap in two parts. First, it examines the rise of China-Europe railway services and their drivers. China-Europe rail has grown not only in terms of origins and destinations but also in terms of cargo volume, cargo type, and overall competitiveness. Driving these trends are several political, technical, and technological factors, chief among them subsidies and improvements in logistics processes. Second, it considers these developments within a broader trade context and identifies several challenges to future growth, including trade imbalances, capacity constraints, and the enduring strengths of maritime shipping….

Drivers

A mix of political, economic, and technical factors are driving these new services, the exact balance of which varies from route to route. As mentioned earlier, some services have run only once, entirely for promotional purposes. Others, particularly those further inland, offer a more competitive middle option between maritime and air freight. Overall, however, it is difficult to imagine these routes emerging as rapidly as they have in recent years without China putting its political and financial weight behind them….

China also provides generous subsidies for these routes, making their true economic viability more difficult to assess. According to reports, subsidies can range from $1,000 to $5,000 for each FEU, accounting for up to one-half the total cost.20 One study that examined subsidies in 2014 found an even higher range, up to $7,000 per container.21 The same study estimated that China’s provincial governments collectively spent over $300 million subsidizing China-Europe block trains during 2011 to 2016. That sum is modest when compared to the $113 billion that China plans to spend on its railways in 2018.

To be sure, China is not the only subsidy provider, nor are shipping subsidies the only avenue for state support. The European Union and its members subsidize both railway infrastructure and operations. Some groups support these measures on social grounds, noting that rail is a more environmentally friendly form of transportation. But Europe’s subsidies largely predate the emergence of China-Europe railway routes. In contrast, China’s financial and political support for these routes has coincided with their rise….

Speed Without Scale

This examination of China-Europe railways has provided two views. The first view, considering these services in isolation, is dramatic. From virtually nothing, they have grown rapidly. The network has expanded to link more Chinese and European cities. These services are faster, cheaper, and more frequent. Increasingly, they carry not only more goods but also a greater variety of goods. China’s political and financial support has paved the way.

The second view is more modest. In a broader trade context, the China-Europe railways present a new offering that has not yet grown from niche to mainstream. Future growth is limited by trade imbalances, the comparative value that maritime shipping offers, and infrastructure constraints. None of these challenges is likely to vanish anytime soon. In the meantime, these services will depend on Chinese subsidies, and the risk of delays will rise as they handle more cargo.

An optimistic scenario for China-Europe rail growth does not dramatically alter these two views. If railways double their current share of trade by value, taking on 2.5 percent of China-Europe trade by volume, that would be a major development for those involved in the rail systems. The sheer size of the China-Europe trade relationship, which exchanged some $570 billion in goods in 2016, means that modest gains produce significant sums. Railway manufacturers, owners, operators, logistics firms, and freight forwarders all stand to gain. A set of businesses would benefit from lower inventory costs. Among cities, those located near the routes and inland, further away from the coastlines, are likely to see the most gains.

But these changes do not add up to wide-ranging economic or political impacts. Maritime trade will remain dominant. The vast majority of the geographic space the railways pass through will experience no difference. The railways are not roads. They are not as accessible to the general public, and opportunities to provide services around them are limited. Of course, the public can benefit indirectly from these services, whether through taxes captured by tariffs or through benefits passed to consumers. But the emergence of China-Europe railways does not signal the return of a world in which overland trade dominates. The railways have found speed, but their scale remains limited.

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