How is the Belt & Road Initiative progressing in Asia?
Late last month, the Nikkei Asian Review, in collaboration with The Banker Magazine and the Centre for Strategic and International Studies (CSIS), published an insightful research article, aggregating key Belt and Road Initiative (BRI) infrastructure projects. They highlight the progress of BRI in 5 countries; Pakistan, Sri Lanka, Indonesia, Bangladesh, and Laos, and discuss some of the key projects in these countries.
Firstly, the article discusses the China-Pakistan Economic Corridor (CPEC), a very ambitious plan, for which China has pledged to spend $63 billion on power plants, ports, airports, expressways, and other infrastructure all over Pakistan. One of the key projects in Pakistan is the Port of Gwadar, on the Arabian Sea. This town’s potential was recognized in the in the 50’s, when the US Geological Services concluded it would be an ideal place for a deep-water port. China is interested in the port so it can link it to its landlocked western region, allowing ships carrying oil and other goods from the Persian Gulf to avoid the Strait of Malacca, shortening the trip by thousands of kilometers.
The Government of Pakistan plans to grow Gwadar into one of the world’s largest ports in the next decade, housing steel mills and oil infrastructure.
"Gwadar port will be a hub to link Afghanistan and Central Asia, but it is not just a trade and logistics center," said Dostain Khan Jamaldini, chairman of Gwadar Port Authority. "We will set up an industrial estate with export manufacturing zones, and invite the motorcycle and electronics industries."
"Gwadar port is not given to China only," Jamaldini said, stressing the authority's willingness to welcome U.S., European and Asian companies.
The chairman denied speculation that China could try to make Gwadar a military port in the future. "Gwadar is 100% commercial. If China [has military] needs, we have Ormara naval base near here," he said. "We have nothing to hide."
The article notes that there are some doubts whether Pakistan will come out of the BRI as a better country. Their trade-deficit with China has been rising, and there are concerns about what happens if Pakistan is unable to fulfill its debt obligations. There is worry that the price paid for Chinese investment could be a huge burden.
The China-Pakistan corridor "will no doubt be a game changer for Pakistan, but we need to be careful," said Ehsan Malik, the CEO of Pakistan Business Council, a business policy advocacy forum. "Ten years' tax concessions, 90-year leases for Chinese companies and cheap imports will impact the competitiveness of existing domestic industries."
The Sri Lankan case study is a prime example of why countries fear Chinese investment: In 2008, construction began on the port of Hambantota, budgeted at $1.5bln over several years. The first phase of the project, costing $360mln, was finished in 2010. 85% of this was funded by the Chinese Ex-Im bank. The port however was loss-making, and the government was unable to repay its debt. Total Sri Lankan debt amounted to $48bln, and their total debt to China totals $8bln as at the end of 2017. To get from under part of its debt, Sri Lanka granted a 99-year lease of the Hambantota port to China Merchants Port Holdings. This has raised concern at neighboring India, among others.
Jonathan Hillman, director of the Reconnecting Asia Project at the CSIS; "The docking of a Chinese submarine at the port of Colombo in 2014 is one reason why the handover of a port at Hambantota in December 2017 raised alarms in Delhi. The nature of the Hambantota transaction, a debt-for-equity deal, als'o raised concerns," he said.
Other BRI projects in Sri Lanka are the Mattala Airport, aka "The World’s Emptiest International Airport", and the upgrading of the port in the capital Colombo, a $15bln project. Sri Lanka’s debt equals almost 82% of its GDP, third highest among EM’s according to the IMF.
In Indonesia, the most ambitious BRI project, a 142 KM railway connecting Jakarta with Bandung, is also one of the most delayed projects. Launched in January 2016, local officials say only 10% has been completed. The delays have been caused by permit problems, issues with land acquisition, and disbursement of the loans by the China Development Bank. Some analysts think the main reason is that China has other priorities in the region, such as strengthening trade with closer neighbors. Other projects in Indonesia include an industrial park on Sulawesi Island, and more infrastructure such as airports across the island nation. China is still hoped to be a large financier of President Widodo’s $355bln infrastructure plans.
The CSIS Reconnecting Asia Project has identified three key BRI projects in Bangladesh; A railway from Dhaka to Jessore, the Payra coal-fired powerplant, and an underwater tunnel under the Karnaphuli River. Financing of the projects is dominated by Chinese banks, and Chinese contractors do most of the construction. Construcion for the $1.65bln powerplant at the port of Payra has already started, by a JV of a Chinese and Bangladeshi company. Equity will be split equally, but the debt is fully provided by the Chinese. The $4.4bln railway is expected to launch in 2022, and will be developed by China Railway. Construction on the tunnel is yet to commence, the delay being caused by the Ex-Im bank withholding the funds for the project.
In Laos, the main project is a 414km long railway between the capital Vientiane and the Laos-Chinese border. Work on this is well underway, and it is scheduled to be completed at the end of 2021. This project has been in the making long since long before the idea of BRI was conceived.
"When it comes to Laos, China has for many years had a strategy to use its railway system to drive into Southeast Asia to bind these countries to China," said James Stent, who served for 13 years on the boards of China Minsheng Bank and China Everbright Bank in Beijing.
There are several concerns about this project. Firstly, most of the labor is done by the Chinese, so there are no knock-on benefits for the local economy. Secondly, Development Banks are worried that the $6bln project will worsen Laos’ already high debt levels, standing at 68% of GDP. This project is setup as a 70/30 JV. Laos, with a 30% share, will need to contribute $700mln over the 5-year construction period. $250mln of this will come from the national budget, and the remainder is borrowed from the Ex-Im bank, with interest at 2.3%, a 5 year grace period, and a maturity of 35 year.
The main worry is of course, who will step in if the railway does not make money.
"It probably is not a commercially viable project in the time frame of a Western bank," Stent said. "But once you add in what China's objectives are, it makes sense for China."