3 May 2018

The role of BRI in developing trade corridors

The improvement of trade corridors for Chinese and foreign companies is a key component of the Belt and Road Initiative (BRI). The improvement of trade corridors for Chinese and foreign companies is a key component of the Belt and Road Initiative (BRI) as the world’s second-largest economy seeks to make the transition from a low-value manufacturing economy to one driven by consumption and higher value-added manufacturing services. Six international economic cooperation corridors – The New Eurasia Land Bridge and routes between China-Mongolia-Russia, China-Central Asia-West Asia, China-Indochina, China-Pakistan and Bangladesh-China-India-Myanmar – are set to jump-start trade between China and its neighbours near and far.

Ajay Sharma, Regional Head of Global Trade and Receivables Finance for Asia-Pacific at HSBC Commercial Banking, notes that the amount of annual trade between BRI countries is expected to surpass $2.5 billion in the next decade, from $1 billion in 2014, which is a result of improvement in infrastructure and the increase in consumption power through the rising middle class. Over the long term, Chinese companies should become adept at competing with global peers on the basis of both technology and lower-cost manufacturing.

“We do expect the Chinese companies to become better, and to become best-in-class over time, and you will see western firms having to keep pace with the changes Chinese firms are driving,” he says.

These developments are likely to foster supply chain competition, offer more opportunities for western consultancies and have their strongest regional impact, initially in Asia.
Prospects for new supply chains

The historical tendency of US and European companies to rely on small and medium enterprises (SMEs) in Asia and China for low-cost manufacturing is likely to continue as BRI investment helps to extend supply chains and develop new ones in Asia.

“As the initiative gains momentum, the number of SMEs and micro-enterprises will rise substantially, and these businesses will become key players in the global supply chain. Their operations – ranging from categorisation and sourcing, to retail and logistics, among others – will be different from the traditional supply chain model in Europe and the US, creating new challenges for supply chain managers.” Mr. Sharma says. “The result will likely be the development of new trading platforms, business models and distribution channels that don’t rely on significant land or resources.”
Looking for consultancy-opportunities

Regardless of whether investors have traditionally used the joint venture model or government-financing, once they are applying for private sector financing for new projects they will need to be able to make the case for a project’s viability, Mr. Sharma says.

“You do need to make sure that the project stacks up from a marketability perspective to banks and financial institutions and to the market,” he says. “And for that to stack up, it means that you need to get the independent advice of consultants. That can be one driver in terms of how to get international firms involved.”

Many infrastructure projects already underway attract a range of engineering consultants, law firms, accountants, architects or financial advisors, helping to put financing packages to take projects to market, after “scrutinising them with great care”.

In the case of the Singapore high-speed rail project, US engineering firm AECOM is doing an advanced engineering study, a consortium of Canada’s WSP and UK-based consultants Mott MacDonald and Ernst & Young are providing project management support and technical advice for systems and operations as well as developing the technical and safety standards, while UK architect firm Farrells is helping to design the project’s main rail station in Singapore.

Similar collaboration is taking place in Indonesia’s Jakarta-Bandung high-speed rail project, where UK consultancy Atkins is working on the project’s design contract.

“I really think there will be significant opportunities; the key is just to make sure that MNCs are aware of the potential presented by the BRI opportunity and well positioned to capture it,” Mr. Sharma says. “There is a big opportunity for consultancies across the world to share credit and take part in these projects.”
The early beneficiaries of ASEAN infrastructure growth

With the BRI envisioning six global mixed-trade corridors, activity is already underway in each region, with ASEAN being the initial primary beneficiary. New economic trade corridors within the region include those linking Bangladesh and China, and India and Myanmar.

“The region where you are seeing the maximum activity at this point in time, which is what we are focused on, is ASEAN, but almost every project will create significant benefit for each of the countries that they are going to go into,” Mr. Sharma notes. “If you go to Bangladesh, it’s the construction of the Padma Bridge connecting Dhaka with the 21 districts in southern Bangladesh, where historically, had taken as much as 14 or 15 hours to travel. This kind of improvement and further development along the Belt and Road will increase productivity and efficiency in the supply chain, making trade easier.

Which sectors are likely to see the greatest initial benefit from BRI investment depends on the part of the region, he adds.

“There are various ways to look at the BRI; one of them is obviously which arethe industries that are traditionally export-oriented. They will benefit because of the need for availability of the commodities they produce in the region”.

At the same time, analysts are increasingly looking at the importance of global value chains.

“We see an aggregation of value chains in Asia. Consumption power shifting from West to the East through the economic prosperity along BRI countries may change the trade flow from Inter-region to Intra-region.”

As a result, China is exporting more value-added goods like electronics appliances instead of the Garment and Textile products..

The BRI has already created 160,000 jobs, he observes, which means more buying power and more capacity to spend, so the sectors like to be developed will be very much influenced by that country’s economic requirements.

“If you look at markets like Indonesia, India or Bangladesh or Sri Lanka, it’s more around core infrastructure development. If you go to Malaysia and Singapore, they are looking at high-speed rail because they are trying to get far more modern infrastructure built to stay ahead,” he says, noting that the expansion of digital companies such as Alibaba are creating new infrastructure demands on the ground.

“You do have niche projects that will also take place around e-commerce or mobile phone technology,” he adds. “Some of the market leaders in China could look to use the BRI and look at the digital initiatives.”
Changing the nature of cross-border investment

The sheer scale of investment required to fulfil BRI projects is likely to change and expand the nature of collaboration.

“It’s not very obvious, at this point in time where all the money is going to come from,” Mr. Sharma points out. “If the Asian Development Bank says that Asia-Pacific needs $1.5 trillion in infrastructure spend per year through 2030 to sustain its growth trajectory, these are staggeringly large numbers. And then you look at all the resources that governments have, and companies have, and ADB and all multinationals that might be able provide funding have, and you’re still going to have a gap, and the funding gap for Asian countries themselves is estimated to be 2.4 per cent of projected GDP for 2016-20.

Many countries will need to re-examine their funding needs from a strategic perspective, and may rethink whether they are happy to have foreign investment in sectors that were formerly closed to it.

“Some of the countries are very open, some of them have had their own restrictions around certain sectors, but most countries are happy to have foreign investment in core infrastructure sectors,” he says.

Chinese companies are increasingly happy to provide equity or enter into joint ventures with local partners, the latter of which are often driven by government requirements that push for a local partner. It also helps with navigation and sourcing within the country. Where a project requires private sector-financing, the partners themselves become critical in importance.

“There just isn’t enough money to meet all of the infrastructure requirements, and BRI is trying to address the access and the opportunities in a very systematic way across most regions,” Mr. Sharma says. “We will see all sorts of equity models in terms of these projects.”

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