By Gabriel Wong
Few people could have envisaged what the Belt and Road (B&R) Initiative entailed when President Xi Jinping first proposed the concept back in 2013. However, four years later, the B&R Initiative has amassed a huge amount of political and economic momentum.
In May this year, President Xi announced at the high-profile Belt and Road Forum for International Cooperation in Beijing that China’s investment in the B&R countries has surpassed US $50 billion and China will contribute RMB 100 billion (US $14.49 billion) to the US $40 billion Silk Road Fund.
There is great market potential along the prospected route. According to the China State Information Center and analysis by PwC the 68 B&R countries recorded a combined GDP of about US $14 trillion, roughly 18.5 percent of global GDP. The total population of these countries is 3.4 billion, 46 percent of the world total. China’s per capita GDP is nearly two times the average of B&R countries, which indicates that the economic development of many B&R countries lags behind China.
With the goal of reviving the ancient Silk Road trading routes, the initiative’s timeline will likely stretch across the next few decades. It will be a driver for long-term growth and expansion as well as corporate profitability. Therefore, strategically, companies need to be involved at an early stage to reap the long-term benefits.
However, where are the real opportunities for foreign companies who are looking to get involved? How can companies successfully evaluate potential B&R projects and prepare themselves to navigate the specific challenges and risks?
According to PwC’s 20th CEO Survey China report Leading through Disruption B&R Initiative has become a key part of Chinese companies’ business expansion strategy as more than 58 percent of executives in China saw investment opportunities emanating from the B&R initiative. Infrastructure development, such as roads, high speed trains, data networks, land use planning, real estate development, urbanization, and tourism, has tremendous growth potential, and will be driven by partnerships, collaborations, joint ventures, and M&As.
The initiative is expected to fuel continued growth in partnerships between Chinese enterprises and their foreign peers. Chinese enterprises may have plenty of experience in constructing large and complex infrastructure projects overseas. However, the transition from construction contractor to investor and operator is new to many of them.
As such there will be many opportunities for global MNCs with world-class expertise to get involved – not only making these a commercial and operational success, but also in playing a vital role in the infrastructure development of these developing markets.
PwC’s newly launched report on the initiative – Repaving the Ancient Silk Routes – explores the three levels that foreign companies, MNCs, and financiers can partner with Chinese companies in B&R activities: Supplies, partnerships, and financing or divestment.
1. Investment of assets
International investors and financiers can tap into the opportunity to partner with Chinese companies by providing capital and investments. B&R projects are usually explicitly or implicitly backed by the Chinese government and therefore there is an improved risk-return ratio in many situations. Furthermore, given that host countries along the B&R will have received significant financing and support from China and multilateral banks, these governments will take more care to minimize disruptions. However, it must be acknowledged that not all B&R projects are guaranteed sound investments, even with support from China and the host country, as some projects will be deemed strategically important even if they are not obviously profitable. Nevertheless, it has been seen that China does welcome investment support to bridge the funding gaps on many infrastructure projects.
2. International partnerships
The B&R Initiative provides foreign companies with the opportunity to form partnerships with enterprises from both China and countries along the B&R to share their technological expertise. The benefits certainly go beyond the B&R project itself on both sides. Partnering with other international players which have prior experience in markets that are less familiar to Chinese enterprises can help bridge the gaps on many fronts. The partnerships which are formed on the B&R project can often extend in home countries to provide foreign companies with strong partners for access to the Chinese market and vice versa.
For example, China has incorporated social responsibilities and environmental protection into its feasibility evaluation and risk management system of providing funding for B&R projects. Foreign MNCs’ practices on the environmental front – featuring environmentally-friendly designs and engineering, efficient buildings, advanced waste processing, and energy-efficient transportation hubs, could offer Chinese enterprises standards, technologies, and solutions for developing markets.
3. Supplying equipment and machinery
Chinese equipment and technology suppliers have already been working closely with foreign MNCs on B&R projects, especially those which possess global expertise in manufacturing technologically advanced equipment and solutions as well. Equipment and technology suppliers can support Chinese companies’ infrastructure and industrial projects in B&R countries much the same way as they have been supporting Chinese customers’ projects within China for the past decades. Such partnerships with Chinese customers outside China can sometimes bring benefits to foreign companies’ business inside China.
4. Operation of assets
The experience and skills needed in constructing a new railroad, highway, dam, port, or airport compared to the skills needed for operating it efficiently and profitably are very different. This is accentuated in B&R projects due to the numerous geographies, governments, and stakeholders involved. This provides an opportunity for operators with experience in managing such complex facilities. Operators can bring their expertise in managing not only the infrastructure facility itself, but also aspects of the supporting ecosystems such as key suppliers, labor unions, and key customers.
5. Divestment of assets
In addition to supplies and sales, foreign companies can also leverage Chinese outbound investments as sources of financing for their divestments. This falls in line with China’s progressive acquisitions to enhance capability in its enterprises, and at the same time offers the foreign company a way to liquidate its assets for financing.
Strategies to evaluate and select projects
However, despite the vast range of B&R opportunities, projects related to the B&R are very different compared to regular infrastructure projects in growth markets, due to their trans-national nature and the subsequent geopolitical, economic and social environment challenges that arise. What are the risks associated with B&R projects? Which are the key strengths and assets that a company needs to develop in the long term to succeed in a B&R project?
Foreign companies need to identify and evaluate the risks which are specifically associated with a B&R project and make plans to mitigate these risks. These risks will range from geopolitical, due to changes in political regimes during a project’s lifespan, to funding, when host countries are unable to meet the costs of development, and operational, as many local partners will lack the expertise and experience of delivering complex infrastructure projects in these growth markets.
Overall, companies need to develop contingency strategies, alignment with governments, trusted partnerships, and a risk-sharing approach to position themselves for success.
Contingency strategies: With B&R projects, which typically attract geopolitical attention and straddle multiple territories across a long period of time, it is critical for companies to plan for disruptions in advance. In the course of contract negotiations, any potentially unresolved issues should be accounted for in contingency clauses and a clear exit strategy laid out at the outset.
Alignment with local governments: It is also important to build strong and respected relationships with local authorities, because government influence is widened in many B&R countries, where infrastructure development is critical and regulatory systems are still developing.
Trusted local partnerships: The right partners will understand the sequence of events, unspoken sensitivities, and key roles in the process to facilitate project progress. This is important in many growth markets which B&R projects operate in, where companies need to deal with the fluidity of business.
Risk sharing: Adopting a risk-sharing approach will build trust amongst stakeholders, ultimately lowering cost for all stakeholders. Companies can consider ways to share risks, such as waiving the need for performance bond, carrying the cost of some equipment on their books, or developing a revenue sharing mechanism.
We firmly believe that with the correct approach, foreign companies can successfully navigate through these uncertainties and benefit from participating in the largest trans-continental infrastructure initiative the world has ever known.
To read the full report, go to: http://www.pwc.com/gx/en/issues/high-growth-markets/publications/repaving-the-ancient-silk-routes.html
Gabriel Wong is PwC China Head of China Corporate Finance and One Belt One Road Leader