Trade & Supply Chain

Companies stuck between risks and opportunities of new BRI infrastructure

Published: Nov 2020

New ports, roads and rail networks are springing up across Asia as China’s giant BRI infrastructure build comes on stream. The potential for foreign companies to invest off the back is huge, but it also comes with complex issues attached. None more so than navigating the growing East West digital divide.

Opportunities for foreign companies to get involved in helping construct Sri-Lankan capital Colombo’s Port City have been relatively thin on the ground. Chinese state-owned companies have dominated the ambitious construction led by China Communications Construction Company, CCCC, since a line of dredgers began reclaiming land from the Indian Ocean in 2014.

But as the skyline of Colombo’s own Dubai, complete with a marina and glittering financial and entertainment districts, begins to change, the hope is foreign investors from property developers to hotel chains, logistics companies and service providers will start to arrive. “Colombo’s Port City offers a competitive alternative to Singapore for regional banks and insurance companies and a place for back office services. The working population will need restaurants, bars and gyms,” enthuses Chris Devonshire-Ellis, founding partner at Dezan Shira & Associates Asia, who advises multinationals on BRI investment opportunities.

As thousands of Chinese-built and funded BRI projects in more than 100 countries stretching along the old silk route begin to come to fruition, enthusiasts say the real BRI opportunity for multinational companies shut out during the construction phase has finally arrived in the project’s next evolution. The BRI requires an estimated US$26trn, but China will only fund around US$1.3trn. Witness how China is only financing a third of Port City’s US$24bn price tag, making foreign investment both crucial and leaving a huge opportunity to leverage off brand new infrastructure.

Yet many multinational companies view BRI investment through a cautious lens. It is saddled with a bad reputation linked to some countries amassing debts they can’t repay, corruption scandals and mistrust around local employment opportunities and over reliance on Chinese expertise and supply chains within projects. Elsewhere, the climate emergency is growing, but much of the BRI’s energy infrastructure is polluting and tied to fossil fuels. Between 2000 and 2019, Beijing’s two leading policy banks (China Development Bank and Export-Import Bank of China) provided US$183bn in energy finance to BRI countries, which went mostly to oil, coal and hydropower. This compares with the banks’ US$4.8bn funding for solar and wind projects, according to data from Boston University’s Global Development Policy Center.

Perhaps the biggest roadblock to corporate opportunities comes via souring China US relations. A digital overlay that includes 5G connectivity and AI technologies lies at the heart of the BRI and is key to transforming the new infrastructure into integrated ports, rail networks or smart cities. Yet US sanctions make working with much of China’s tech sector increasingly difficult for many companies, leaving unknowns around how they will navigate the digital integration behind their investment. It makes a challenging backdrop for multinationals wanting to take advantage of Asia’s explosive consumption markets.

The upside

To be sure, multinationals are starting to invest off the back of BRI infrastructure. Korean, Japanese, Singaporean, French and Canadian companies are amongst a cohort of investors offering new consumer-facing businesses in Cambodia (a big recipient of BRI lending) to capture the upside of new infrastructure, says Henry Tillman, CEO and Founder of China Investment Research, part of consultancy Grisons Peak. Elsewhere, he notices that western companies are moving their manufacturing arms out of China to countries like Cambodia, Laos, Vietnam and Thailand, benefiting from Chinese-built transport corridors across the region and alongside which real estate developers are beginning to snap up swathes of land.

Meanwhile, investment flows into Pakistan off the back of new infrastructure includes companies from the US, Saudi Arabia, Netherlands, Turkey and the UAE. “The world remains transfixed on Chinese debt in the BRI and is not focused on the equity investment going in,” says Tillman.

AECOM’s Scott Dunn, Vice President, Strategy & Growth South East Asia, observes similar changes. The US engineering group, which designs new BRI infrastructure as well as supervising the construction process and ensuring completed assets function as designed, is one western company involved in BRI construction. “In some cases, multinational companies are starting to come in and in certain areas where the infrastructure is finished, we are seeing an increase in trade because of better facilities. Pakistan has benefited from a new port and roads. It’s a big improvement compared to what it was before he says.

The ripple effect for businesses and investors of good infrastructure is best encapsulated in the transformation of Greece’s Piraeus port, believes Mukhtar Hussain, Head of BRI and Business Corridors, Asia Pacific at HSBC. Ever since China Ocean Shipping Company, COSCO, overhauled the creaking infrastructure, the port has turned “from problem child to success story.”

More lies ahead. In the BRI’s next phase, China will actively court foreign companies. It is already evident in Chinese companies working with global names on the ground in BRI countries like Germany’s Siemens, GE and Honeywell. Going forward, Chinese companies seeking to invest in the region will increasingly partner with multinationals who already have a footprint, predicts HSBC’s Hussain. “A Chinese company doing something new in a market where a multinational already has a long-term association will be keen to align and create a win-win. We expect more international cooperation to manifest in actual examples as China seeks to be more inclusive.”

BRI projects only count for a small amount of AECOM’s US$20bn annual revenue, but the firm is involved in a growing number of projects. AECOM’s work is divided equally between strategic partnerships with a cohort of Chinese developers or contractors and working directly with local government-owned groups building out their transport system. “We are one of the larger global companies doing this kind of work,” he reflects.

And experts expect the pipeline will continue to flow as ASEAN countries’ demand for BRI infrastructure continues unabated. HSBC estimates around US$70-80bn of Chinese infrastructure investment to ASEAN countries is currently in the pipeline. The dialogue is also beginning to shift from the infrastructure story to how BRI can be a force for global good, notes Hussian. This could be around building social infrastructure like hospitals, housing and schools, he suggests. “The BRI could drive much more investment into these critical sectors. This is what governments need and we see BRI evolving accordingly.” he says.

The problems

But despite the investment potential, foreign corporates remain wary. They cite familiar worries around unstable currencies in some emerging economies and challenges around transferring money. Political instability is another concern. Malaysia’s high speed and urban rail programme, part of which was tied to BRI, turned messy following a change of government when the new regime renegotiated the price and changed the routing. “If you look at all the countries the BRI touches, many are politically unstable. It means things can change quickly which is a risk because infrastructure investment is long-term and doesn’t happen within one political cycle,” says AECOM’s Dunn. “Ultimately success will depend on how the currency risk is protected and how transparent the financial and legal systems of BRI countries become, especially in Southeast Asia.”

But other, bigger challenges lie beneath, none more so than finding the right partner on the ground. Andre Wheeler, Director of Wheeler Management Consulting based in Perth, Australia, advises all clients seeking to partner with a local entity off the back of BRI infrastructure to carefully unravel who they are investing alongside. It involves a deep dive of the corporate structure, operating and litigation history and key management and decision makers, as well as ascertaining ownership of the infrastructure assets.

Wheeler, who estimates that only 6% of the current investment in BRI projects is by non-Chinese entities, advises all his clients to peel back the layers. Investors might find they are partnering with Chinese state-owned companies and not a local entity at all, he warns. “There are a number of instances where a local corporation has been set up, in a sense a “front” company, but regulatory and management control comes from China. Landbridge in Australia is such an example.”

Partnering with private Chinese companies is just as much of a risk. New powers have recently given the Chinese state more control over private enterprise within China, he says. “The CCP has increased its control in private enterprise, particularly through the broadly defined “national security interest” test. Investors should ensure they are investing or partnering with a company that falls outside Chinese law – and is not an SOE.”

More straightforward investment comes via construction of apartment blocks or warehouses in 100% ownership models, he suggests. He also flags how some BRI countries also offer investment opportunities without the complexities of Chinese partnership like Sri Lanka, and increasingly Vietnam, which straddles the BRI as well as Japanese, Indian and African trading corridors. “Vietnam has opened up its foreign investment laws and is also wary of China. It is becoming a little like Switzerland and investors like this,” he says.

In Columbo, companies seeking to invest will typically partner with a local entity, familiar with local regulations and able to do the groundwork, says Devonshire-Ellis, who reassures investment doesn’t involve partnering with a Chinese company. “There is no need to be involved with the Chinese whatsoever. Companies invest alongside local entities.”

Elsewhere, Wheeler says the Philippines offers less complex investment opportunities, and believes that more big-ticket infrastructure investment in the region will start to appear without Chinese involvement. Most recently he is advising on investment opportunities linked to a new feasibility study around a land bridge in Thailand between two seaports on the Andaman sea and the Gulf of Thailand to bypass the Strait of Malacca. In another example, initiative like Japan’s Indo-Pacific Fund, a collaborative effort with America and Australia to develop and offer complementary infrastructure within the Indo-Pacific region, also suggests a shift away from China.

Digital divide

But the biggest potential risk and roadblock for multinational companies seeking to invest off the back of BRI infrastructure comes courtesy of the growing digital divide between China and the West. A digital overlay that spans 5G connectivity and AI technologies lies at the heart of the BRI and is key to transforming Chinese-built infrastructure into integrated ports, rail networks and smart city packages, complete with facial recognition systems and big data analysis to automate services such as traffic management, sewage systems and public safety. According to research by RWR Advisory, a Washington-based consultancy, Chinese companies have done 116 deals to install smart city and so-called safe city packages around the world since 2013, with 70 taking place in BRI countries.

For example, logistics, supply chain and freight forwarding groups setting up shop in Colombo’s Port City will likely have to integrate Chinese technology protocols and standards. “Port City investors may be engaging with a sovereign Sri Lankan company, but the infrastructure and digital connectivity will be provided by China,” says Wheeler. This leaves investors in danger of signing up to agreements with Chinese tech companies, blacklisted by the US. “Potential investors are wary of US sanctions, and not having enough knowledge around who they are contracting with,” he says. The US has sanctions against 24 entities, including the CCCC and its five subsidiaries, all companies involved in an estimated 900 projects across BRI countries.

It leaves western companies needing to judge which part of BRI they can focus on, and what part of the opportunity to tap on a case by case basis. It also plays into how treasury teams navigate the growing narrative around the emergence of two separate supply chains – one for the Chinese market and Asian bloc, and one for the rest of the world. Chinese manufacturing entities are increasingly seeking lower cost production outside China, and Asian countries are increasingly relying on consumption markets within Asia – particularly China, explains Hussain. “Trade and investment in Asia is becoming increasingly Asia-centric and intra-Asian trade flows are increasingly more significant than investment flows from Europe and the US.”

Witness how Chinese companies are preparing to invest off BRI infrastructure in contrast to foreign groups’ caution. There has been a jump in Chinese companies raising money for BRI investment via IPOs, notes Anastasia Gordeeva, BRI Manager at law firm Charltons Law in Hong. “An increasing number of Chinese companies are listing BRI-related projects on the Hong Kong stock exchange via IPOs. It is enabling them to tap overseas investment, as well as a Chinese investor base via Hong Kong’s Stock Connect with Shanghai and Shenzhen stock exchanges,” she says.

Of course, the pandemic has pressed pause on many multinationals’ ability to leverage BRI infrastructure anyway. “We still supply some advisory services to people who are interested in BRI projects, but travel has been non-existent with COVID and we are doing it all on the phone,” says Wheeler. HSBC’s Hussain agrees the scale and speed of BRI projects has diminished on the back of worsening geopolitics and the consequences of COVID. Meanwhile, some companies held back from making big decisions before the US election in the hope of more certainty and predictability around US tariffs.

But the momentum, scale and long-term timeline driving BRI suggests it will only be a short break. Multinationals will increasingly want to take advantage of China’s more pragmatic view on international involvement and constrained ability to be the sole financier of all things BRI. “There may have been a slowing of BRI investment right now, but it’s here to stay. China judges the short term by decades, and this is an opportunity for a company with a long-term view,” says Hussain. Just exactly how companies navigate the opportunity remains to be seen.

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