Repaving the ancient Silk Routes

Monday, 19 June 2017

This week's Growth Markets Centre (GMC) article focuses on the GMC's latest report on China’s Belt and Road initiative – Repaving the ancient Silk Routes. The authors write about the country’s global ambitions to drive long term growth, and how this initiative presents opportunities for foreign companies. They also discuss B&R’s unique considerations, and strategies companies can use to successfully evaluate and select B&R projects to be involved in.

Since the Belt and Road (B&R) initiative was first announced by Chinese President Xi Jinping in late 2013, there has been much excitement about its ambitious scale, as well as speculation as to what constitutes a B&R project, where the commercial opportunities are, and how foreign companies can get involved.

PwC’s report, Repaving the ancient Silk Routes, presents our perspective that the goals of the B&R initiative are multi-pronged. On the one hand, it opens markets to digest China’s industrial overcapacity and facilitate trade between the participating 65 countries along the six economic corridors, whilst on the other, it also potentially strengthens its diplomatic relations globally.

However, the initiative will also enable China to gain global recognition in developing complex transnational infrastructure projects, such as, but not limited to, high speed railways, ports, highways and power generation facilities.


"In many way, the initiative serves as a blueprint for how China wants to further connect itself into the global economy and strengthen its influence in the region. The initiative has added fresh impetus to China and the rest of the world to promote regional cooperation and presented numerous opportunities for foreign and Chinese companies to be involved. It is 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."

- Frank Lyn, Markets Leader, PwC China and Hong Kong


Finally, it is also fair to say that the B&R aligns with China’s ongoing national reform agenda, building on the “Go Out” policy launched in the 1990’s, and complements the current 13th Five-Year plan and the Made in China 2025 strategy.

Nevertheless, underpinning all this is a focus on developing bankable infrastructure projects supported by large international agencies, which infers that the B&R goes beyond just geopolitics and embraces the promotion of commercial interests, trade, culture, and social integration.

Aside from these goals, the B&R initiative is a catalyst for infrastructure development in some of the least developed countries in the world, which will drive economic growth by stimulating trade and creating domestic jobs. In this regard, the B&R’s infrastructure investments are expected to impact a population of about 4.4 billion or about one third of the global economy.

Opportunities for foreign companies

The B&R initiative is such an extensive and ambitious plan that China, even with all its resources, people and financing, still seeks to develop partnerships with foreign companies to help it achieve its ambitions.

With that in mind, we have identified six areas for foreign companies to partner with enterprises from both China and countries along the B&R:

  1. Supplying advanced construction equipment, machinery and cutting-edge solutions for infrastructure projects, for which there has already been a lot of collaboration between Chinese EPC firms and foreign multinationals and this is likely to continue to grow
  1. Partnering in engineering, procurement and construction (EPC) - companies with established international experience in large-scale infrastructure projects or local EPC firms of respective countries can partner with Chinese firms and contribute this experience when navigating lesser developed, more complex markets
  1. Contributing international project management expertise, especially for complex, large-scale B&R projects in remote locations, which require managing multiple stakeholders
  1. Operating new facilities and bringing operational experience in managing newly constructed infrastructure effectively, profitably and sustainably
  1. Investing in bankable infrastructure projects, either by co-investing with Chinese players, or by investing into existing Chinese instruments such as the Silk Road fund or CITIC fund
  1. Divesting assets to Chinese players who are keen to acquire to enhance existing capabilities

However, despite this multitude of opportunities, B&R infrastructure projects bring with them a unique set of challenges compared to regular infrastructure projects, given the more remote and less familiar locations that the construction of B&R projects take place in. Usually the projects are larger in scale, transnational, involve differing regulatory environments, and multiple stakeholders with varying interests. Furthermore, the associated risks of infrastructure projects are often not just confined to the dam, road, port or railroad being developed, but also is dependent on the whole supporting ecosystem.

Evaluating unique B&R considerations

As mentioned, such projects are frequently developed in conditions that are complex and often beyond a company’s control. Foreign companies may find their usual project management and evaluation approach inadequate amidst the institutional voids that characterise many of the countries along the B&R routes, such as inconsistencies in regulatory regimes and underdeveloped credit markets. Therefore, companies ought to ensure they evaluate the following aspects in addition to the usual due diligence processes:

Regulatory risks: Inconsistencies in regulatory regimes affects many B&R projects that are involved in monopoly sectors (e.g. power grids), or operate assets in the national security interests (e.g. oil refinery and storage tanks) as these demand tight controls to avoid the abuse of monopoly power or compromises of the national interests.

Geopolitical risks: Changes in political regimes or in bilateral relations between countries involved in the B&R could occur during projects’ lengthy lifespans.

Funding risks: Funding gaps and host countries’ varied ability to repay loans, further exacerbated by higher capital and debt service ratios of B&R projects, can lead to commercial viability issues.

Operational risks: Companies ought to remain vigilant in operational planning, even as state-owned enterprises (SOEs) from both China and host countries are starting to gain international experience. Operational risks can result from gaps in experience of stakeholders and the increased complexity of B&R transnational projects which result in delays or costs overruns.

Strategies to evaluate and select projects

In addition to the consideration of B&R-specific project risks, potential investors should make a strategic evaluation as to which B&R projects to be involved in. This can be achieved with a commercial viability assessment, combined with a review of the maturity of the supporting ecosystem and the confirmation that the project complements the company’s other similar projects.

Commercial viability assessment: Companies need to apply a strict focus on a project’s economics balanced against its risks to develop a credible, robust business case based on market supply and demand. Key aspects to be evaluated in the assessment should include project timelines, potential capacity constraints, supply chain challenges, different stakeholder interests, as well as any incentives offered by governments and the subsequent companies’ reliance on these incentives.

Review maturity of the infrastructure ecosystem:
Companies also need to evaluate the maturity and future plans of surrounding infrastructure. This is dependent on several factors including plans to develop a multi-modal network linked to supporting facilities in the ecosystem, and whether these plans are backed by inter-government agreements or aligned policies.

Establish a portfolio fit: In selecting which projects to bid for, companies ought to consider how taking on similar projects to its current portfolio could add more value, versus being exposed to too many of the same risks. For example, for a company that is operating a project in Kazakhstan may want to re-evaluate its involvement in another project in the same country at the same time, as that may overly expose it portfolio to similar risks brought on by operating in a similar business environment, despite having the benefit of existing experience. Instead, companies can mitigate these risks by investing across a varied set of markets and sectors within the B&R initiative, looking at projects of different stages of maturity, or invest in different parts of the infrastructure supply chain.

Positioning for success

Having identified where the most appropriate B&R projects exist and understanding how to evaluate the risks unique to it, interested companies also need to ensure they have the necessary strengths and assets to succeed, such as:

Contingency strategies: As B&R projects typically attract geopolitical attention and straddle multiple territories across long periods of time, it is critical that companies develop robust contingency plans tailored to emerging markets. In the course of contract negotiations, any potential unresolved issues should be accounted for with contingency clauses and a clear exit strategies laid down at the outset.

Alignment with local governments: It is also important to seek alignment with government stakeholders and build strong and respected relationships with local authorities. Government influence is widened in many B&R countries, where infrastructure development is critical and regulatory systems are still developing.

Trusted local partnerships: The development of strong long-term partnerships with companies having prior experience of working with the local government is critical in B&R projects. The right partners will understand the sequence of events, unspoken sensitivities and key actors in the process to facilitate project progress. This is important in many growth markets that B&R projects operate in, where companies need to deal with the fluidity of business.

Risk sharing: Risk allocation is another important consideration in B&R projects where there are typically more stakeholders, who exercise large influence on the occurrence of the risk. Adopting a risk-sharing approach will build trust among stakeholders, ultimately lowering costs 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.

The B&R initiative is a vast and ambitious programme. Its multi-dimensional construct makes it incredibly complex, but by carefully evaluating and planning for specific B&R risks, companies can participate in possibly the largest trans-continental infrastructure programme the world has ever known. And it is only just beginning!


David Wijeratne | PwC Growth Markets Centre Leader
+65 6236 5278 | Website

Boon Ling Neu | Growth Markets Centre - Capital Projects and Infrastructure
+65 6236 4029 | Website

Stella Lau | Growth Markets Centre - China
+65 6236 4235 | Website


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