Building BRI Infrastructure to Drive Common Development

Abstract

In the past decade, China has deepened its involvement in the development of infrastructure in BRI countries, with a growing number of Chinese companies involved in BRI projects. According to China’s Ministry of Commerce, from the launch of BRI in 2013 to 2021, the annual value of newly signed contracts of BRI projects by Chinese companies increased from US $72.3 bn to US $134 bn. Within this period, the total value of newly signed contracts of BRI projects by Chinese companies reached US $1.1 trn, accounting for around 51% of the total value of newly signed contracts of foreign projects by Chinese companies.

Chinese engineering contractors are already internationally competitive. According to Engineering News-Record (ENR), the proportion of Chinese companies in ENR’s Top 250 International Contractors rose from 13% in 2012 to 28% in 2021 in terms of total turnover. In 2021, Chinese companies among the ENR Top 250 International Contractors had a market share of 59% in Asia (by turnover), 55% in Africa, and 40% in the Middle East.

Sustainability is the prerequisite for promoting the high-quality development of the BRI, and for infrastructure construction, sustainability not only includes economic benefits, but also policy communication and improving people’s quality of life. China’s engagement in BRI infrastructure projects usually takes three forms, i.e., contractual cooperation, investment, and operation. Projects under the contractual cooperation model could be profitable, but the economic performance of different projects under the investment and operation models could diverge. For example, some BRI power grid projects have higher investment returns than domestic ones, while investment returns from some projects with high risks miss expectations. Transportation infrastructure projects generally have long payback periods, but they are important for improving connectivity within regions, people’s quality of life, and policy communication (e.g., Jakarta-Bandung High-Speed Railway).

To address the challenges for the sustainable development of BRI infrastructure projects, cooperation and competition (“co-opetition”) among companies can be encouraged, and the supporting industries and infrastructure can also be improved. This could facilitate project implementation, boding well for the achievement of inclusive, high-quality development that improves people’s quality of life and increases economic benefits.

We believe the following measures can be taken to improve the sustainability of BRI projects: First, channeling resources to high-quality projects and focusing on the development of sustainable projects that improve people’s quality of life. Second, building a development mechanism that combines guidance from the government with coordination and cooperation among companies. Third, improving capabilities of existing insurance institutions and facilitating the diversification of financing channels, e.g., strengthening the insurance capabilities of China Export & Credit Insurance Corporation for overseas investment and promoting innovative financing models such as public–private partnership (PPP) and hybrid financing.

Author: YANG Xin, CHEN Yan, ZHENG Kuan, ZHANG Wenjie, KONG Shu, LIU Jiani, WANG Weiyue, GU Yuanfan.

8.1 Remarkable Achievements Have Been Made in BRI Infrastructure Development

In this section, we first analyze the positioning of infrastructure in BRI, its role as the foundation of the “five pillars of the BRI”—namely, policy coordination, infrastructure connectivity, unimpeded trade, financial integration, and closer people-to-people ties¹—as well as its importance and necessity. We then assess the progress of China’s infrastructure development under the BRI.

8.1.1 Positioning of Infrastructure in BRI Development

Infrastructure is the physical basis for the provision of public services for social production and people’s everyday life, as well as a public service system aiming at ensuring the normal social and economic activities of a country or region. Infrastructure, as defined by the World Bank, includes, among others, services from public utilities (power, telecommunications, piped water supply, sanitation and sewage, solid waste collection and disposal, and piped gas), public works (roads and major dam and canal works for irrigation and drainage), other transport sectors (railways, urban transport, ports, waterways, and airports), education, and health care.² According to the American Enterprise Institute for Public Policy Research (AEI), transportation, energy, power, and related projects accounted for 60–80% of China’s infrastructure investment in BRI countries over 2013–2020. Therefore, the infrastructure investment covered in this section mainly refers to the above fields.

Since China put forward the BRI in 2013, infrastructure connectivity, as the physical foundation of the “five pillars of the BRI”, has been a priority and an important starting point for promoting the sustainable development of the global expansion of various Chinese industries. To understand the importance and necessity of infrastructure construction for the BRI, we can take a closer look at the needs of BRI countries, China’s own strengths, and the current growth momentum of companies.

First, as BRI countries generally lag in infrastructure construction and have limited local investment capacity, they have urgent need for “external” infrastructure capacity. According to Global Infrastructure Hub,³ Asia has the highest potential infrastructure investment demand, with annual investment expected to grow from about US $1.6 trn in 2022 to nearly US $2.1 trn in 2030. Although the total demand for infrastructure investment in Africa is limited, it faces a large funding gap due to insufficient local supply capacity. Such a funding gap is expected to account for 1.44% of the continent’s total GDP in 2030, much higher than the rest of the world (Fig. 8.1).

Except for a few countries such as Singapore, most BRI countries face large infrastructure investment gaps and widespread demand for “external” capacity, especially Myanmar, Russia, Egypt, and South Africa. We expect the infrastructure investment gap to account for 1.53–3.01% of their GDP in 2030, much higher than the global average of 0.55%. We believe addressing the investment gap will be the focus of China’s overseas infrastructure investment (Fig. 8.2).

Fig. 8.1

Source Global Infrastructure Hub, CICC Global Institute

Infrastructure investment demand and investment gap in 2030 in different continents.

Fig. 8.2

Source Global Infrastructure Hub, CICC Global Institute

Infrastructure investment gap in some countries in 2030.

Second, as a country with strong infrastructure construction capability, China has accumulated extensive experience in construction management and operation. Thanks to the large number of infrastructure projects at home and abroad, China has gained competitive advantages across the entire industry chain from planning to design, construction, operation, and management. Globally, it ranks highly in terms of installed capacity of power generation and mileage of expressways and high-speed railways (HSR).

China’s strong construction capability is attributable to several factors. The country has a diversified and stable raw material supply system. According to data from ccement.com and the World Steel Association, China has the largest production capacity in the world for major raw materials such as cement and crude steel, accounting for 55% and 53% of the global output in 2021. China also has a large number of internationally competitive high-quality companies. According to Fortune magazine’s list of the world’s 500 largest companies in 2022,⁴ of the 16 companies in the engineering and construction industry in the list, 12 were Chinese, including all the top 6. According to ENR, Chinese contractors rank No. 1 in terms of construction revenue in Africa, Asia, and the Middle East, accounting for more than 60% of the total revenue in Africa.⁵

Lastly, from the perspective of companies’ growth momentum, as competition in the domestic infrastructure construction sector is increasingly fierce, companies are more willing to expand overseas. According to the National Bureau of Statistics (NBS) of China, annual revenue growth of Chinese construction companies has slowed in recent years, from a high of more than 20% in 2010 to less than 10% by the early 2020s. Meanwhile, the number of construction companies has been growing rapidly, and domestic construction companies are facing mounting competitive pressure, with their gross margins on a downtrend.

8.1.2 China’s Infrastructure Development in BRI Countries

• (1) China’s BRI projects have been expanding in the past decade, with Asia and Africa currently two major target regions of investment

The scale of BRI projects with Chinese involvement has continued to grow in the past decade. In 2021, the value of the newly signed contracts of BRI projects signed by Chinese companies reached US $134 bn, accounting for 52% of the total value of newly signed contracts of foreign projects signed by Chinese companies. In the same year, China’s direct investment in BRI countries reached US $24.2 bn, accounting for 14% of its total outward foreign direct investment. Both figures grew at fairly high rates, recording 2012–2021 CAGRs of 8.7% and 6.8%, respectively.

Structurally, Asia and Africa are the main target regions for investment, while transportation, construction, and power are the main target industries. In 2021, Asia and Africa accounted for 47 and 30% of the total value of newly signed contract of China’s foreign projects (including non-BRI countries). In 2021, projects focusing on transportation construction, general buildings, and power engineering construction accounted for 25, 20, and 19% of the newly signed contract value of China’s foreign projects, translating into a combined share of 63% (Fig. 8.3).

Fig. 8.3

Source Wind, Ministry of Commerce of the People’s Republic of China, Statistical Bulletin of FDI in China, CICC Research

New contract value of China’s foreign contracted projects and direct investment value grew at a CAGR of 8.7% and 6.8% over 2012–2021 under the BRI.

• (2) BRI projects have undergone three stages of development, with a greater current focus on high-quality development

The development of China’s overseas projects in BRI countries can be divided into three stages: The first stage of preliminary development (when the going global strategy was first proposed); the second stage of steady growth (when the BRI was launched), and the current third stage of high-quality development (the standards required of BRI projects have been raised).

The first stage of preliminary development covers the period from the formulation of the “going global” strategy to the introduction of the BRI. The strategy of going global was officially proposed during the third session of the 9th National People’s Congress (NPC) in March 2000, and was subsequently clarified at the Fifth Plenary Session of the 15th CPC Central Committee in October 2000. According to the Ministry of Commerce and Statistical Bulletin of FDI in China, the value of China’s contracted projects in BRI countries increased from US $14.6 bn to US $72.3 bn over 2005–2013, a CAGR of 22.1%.

The second stage saw the official launch of the BRI in 2013, with project scale growing steadily. In this stage, the two concessional facilities, i.e., Chinese Government Concessional Loans and Preferential Export Buyer’s Credit, provided robust financial support for companies to carry out foreign contracted projects, and the contract value of new projects entered a phase of rapid growth. According to the Ministry of Commerce and the Statistical Bulletin of FDI in China, the value of newly signed contracts of BRI projects by Chinese companies increased from US $72.3 bn to US $134 bn over 2013–2021, a CAGR of 8.0%.

The third stage focuses on high-quality development. At the third symposium on the development of the BRI held on November 19, 2021, President Xi Jinping⁶ stressed full, accurate, and comprehensive implementation of the new development philosophy. According to his speech, the BRI aims at high standards, sustainability, and improved living standards by raising cooperation standards, effectiveness of investment, the quality of investment and production, and resilience of development, and to make new achievements in promoting the high-quality development of the initiative. During this period, China has paid more attention to the high standards and sustainability of projects under the BRI, as well as to improving people’s quality of life, shifting from volume-driven to quality-driven development.

• (3) Chinese construction companies’ share of the ENR Top 250 International Contractors list gradually rising

Chinese construction companies’ share of overseas contracted project turnover has continued to rise over the past decade. In 2021, 79 Chinese mainland companies were on the ENR Top 250 International Contractors list, surpassing the US (41), Türkiye (40), Italy (12), Japan (11), and South Korea (11). International turnover of Chinese mainland companies on the list reached US $113 bn, accounting for 28% of the combined total of the 250 companies, up from US $67.2 bn and 13% in 2012. Central SOEs such as China Communications Construction Company (CCCC), CSCEC, and China Railway Group (CREC) have become the contractors of a number of key projects in the international market. For example, CCCC has independently completed the design and construction of the Mombasa-Nairobi Standard Gauge Railway (SGR) in Kenya, CSCEC has undertaken the central business district project in the new capital of Egypt, and CRG built the China-Laos Railway (Figs. 8.4 and 8.5).

Fig. 8.4

Source China International Contractors Association, CICC Research

Chinese construction companies continued to gain market share among international contractors over 2012–2021.

Fig. 8.5

Source Wind, ENR, Corporate filings, CICC Research

Overseas turnover of China’s top 10 firms on the ENR’s top 250 international contractors list in 2021.

Although Chinese construction companies started taking on overseas projects later than Japanese firms, their contract value has grown more quickly. Japan became involved in infrastructure construction in developing countries through channels such as official development assistance as early as the 1970s, and introduced the “Infrastructure System Export Strategy” in 2013. In 2015, Japan announced Partnership for Quality Infrastructure (PQI), and in 2016, it launched the Action Plan for the Overseas Development of Infrastructure Systems, expanding the scope of infrastructure system export from Asia to the world. In 2018, it was clarified for the first time that Japan would cooperate with China on infrastructure projects in third-party countries, and that it would connect its infrastructure system export strategy with the BRI.⁷ In comparison, China only started exploring overseas markets later with the rollout of the going global strategy in 2000, yet the scale of Chinese companies’ overseas projects has grown rapidly, underpinned by extensive project construction experience, advanced technology, and financial support.

• (4) BRI infrastructure construction facilitates local economic development and boosts international trade

As mentioned earlier, infrastructure is a social public good with positive externalities. BRI infrastructure projects in which China has been engaged have facilitated local economic development, boosted employment, improved living standards, promoted international trade, and driven the development of upstream and downstream sectors of the infrastructure industry chain. Over the past decade, the BRI has facilitated over 3000 cooperation projects, created more than 420,000 jobs in BRI countries, and helped lift almost 40 mn people out of poverty.⁸ For example, the Mombasa-Nairobi Standard Gauge Railway project boosted local economic growth by more than 2ppt.⁹

Moreover, backed by supporting infrastructure, capacity cooperation among countries can help overcome the constraints imposed by limited geographical space. Since the BRI was launched in 2013, China has established cargo freight links with more than 600 ports globally. The China–Europe Railway Express operated a total of about 16,000 train trips in 2021, a significant increase from 80 in 2013.¹⁰ More than 1200 new international air routes have been opened between China and BRI countries over 2014–2020.¹¹ According to the Ministry of Commerce, annual trade in goods between China and BRI countries expanded from US $1.04 trn in 2013 to US $2.07 trn in 2022, with a CAGR of 8%.

8.2 Sustainability of BRI Infrastructure Contains “Economic Benefits” in a Broader Sense

China’s engagement in BRI infrastructure projects usually takes three forms: (1) Contractual cooperation (completing construction as the project contractor, without participating in investment and subsequent operation); (2) investment (as an investor and owning the operation rights); and (3) operation (with the China–Europe Railway Express as a typical example).

We analyze the economics of a typical project in this section because, in our view, economic benefits are essential to the sustainable development of BRI infrastructure projects. In fact, we note that these projects are mainly market-oriented, and that companies take economic value into account before engaging in them. However, does this mean that infrastructure projects that bring limited economic benefits are “unsuccessful”? While the economic benefits might not be reflected at the project level, the “internalization” of the projects through FDI, trade, and RMB internationalization, among others, also reflect economic benefits of these projects, albeit in a broad sense. Moreover, the positive example set by these projects encouraging further economic development should not be overlooked.

8.2.1 Contractual Cooperation: Chinese Companies’ Competitive Advantages Underpin Sound Economic Performance

For the comprehensive central construction SOEs and central construction SOEs specializing in international projects, we calculate the gross margins of their overseas businesses and compare them to the gross margins of their domestic operations. Overseas businesses at CSCEC, CREC, CRCC, CCCC, and Power Construction Corp of China had gross margins of 8–11% in 2021, and overseas businesses at China CAMC Engineering, Sinoma International (overseas cement engineering), and Sinosteel International (overseas metallurgical engineering) had gross margins of 6–17%. Gross margins of overseas projects vary due to differences among companies in terms of competitive advantages and project control capabilities. In addition, profitability of project contractors does not typically represent the overall profitability of the projects.

Chinese construction companies have competitive advantages in terms of experience in large infrastructure projects, cost control, and support from investment and financing systems.

First, after operating in China amid decades of urbanization, Chinese companies have accumulated extensive experience in the construction of domestic infrastructure projects, trained a large number of talented people, and developed a sound market foundation. They have strong technological capabilities and competitive advantages in transportation engineering (HSR, sea-crossing bridges, tunnels, ports, airports, etc.), power engineering (alternative energy such as solar power and wind power, energy storage, etc.), housing construction (ultra-high-rise buildings), communication engineering, and industrial production and manufacturing. Chinese equipment, technologies, and construction capabilities have received recognition from an increasing number of property owners and partners.

In addition, China has a vast territory, and its engineering companies have built some of the world’s largest infrastructure construction projects in complex environments, such as the Qinghai-Tibet Railway, a plateau railway featuring the highest altitude and longest distance in the world, and the Beijing-Guangzhou Railway, the longest HSR in the world measured by operating mileage. In summary, Chinese companies are highly competitive internationally in construction and management of large-scale projects.

Second, Chinese companies enjoy price advantages in some areas. For example, in the power business, Chinese companies have mature technologies and supply products at low prices, and their complete power equipment is well received in the market. This bodes well for the development of Chinese companies’ alternative energy projects (e.g., photovoltaic projects) in the international market.

Third, in addition to funding support from the Two Concessional Facilities, the improvement in China’s diversified investment and financing system in recent years has also offered support to the development and settlement of overseas projects. These are both important aspects of the development and implementation of overseas projects. According to the Belt and Road Portal, as of end-July 2022, China had established bilateral local currency swap arrangements with more than 20 BRI countries and RMB clearing arrangements in more than 10 BRI countries.¹² The Multilateral Cooperation Center for Development Finance (MCDF) fund was established in 2020, in which 10 global financial institutions are participating. The business volume and influence of the RMB Cross-border Interbank Payment System (CIPS) have also been steadily increasing.

8.2.2 Investment: Investment Return Diverges Among Different Projects, but Such Projects Play a Role in Improving Policy Communication and People’s Wellbeing

• (1) Power investment projects: Characterized by scattered distribution and diverging investment returns; investment targets shifting from traditional to alternative energy projects

Power investment projects in BRI countries can bring certain economic benefits. Some BRI countries have a weak industrial base, as well as lower per-capita installed power generation capacity and power consumption than the global average, implying significant potential for cooperation between BRI countries and Chinese power companies in this area. Chinese power companies have earned some returns from global expansion, but the level of returns has diverged among companies as a result of political and economic risks. Power grid companies such as State Grid moved early to expand business overseas, and earned solid investment returns overall. According to the State-owned Assets Supervision and Administration Commission (SASAC), all of State Grid’s overseas investment projects were profitable over 2009–2016.

In the Philippines and other BRI countries, investment projects in state power transmission networks delivered returns of about 16–18%, around 3–5 times that in China.¹³ Specifically, Huaneng Hydropower’s hydropower investment projects in Southeast Asia have registered higher gross margins than those in Yunnan province, earnings from Huaneng Power International and China Shenhua’s thermal power projects have continued to grow, and Longyuan Power’s wind power investment in South Africa has also generated high returns. However, some risky projects have failed to meet expectations for investment return.

Power investment in BRI countries peaked over 2015–2018, and as of end-January 2023, according to incomplete statistics from the CICC Research public utilities and environmental protection team, key central independent power producers (IPPs), namely China’s big five power producers, Three Gorges, State Development & Investment Corp., Ltd. (SDIC), China National Nuclear Corporation (CNCC), and China General Nuclear Power Corporation (CGN), had invested in 113 projects in BRI countries with total installed capacity of more than 74.3GW.

Types of energy sources are expanding from hydropower and thermal power to wind and solar power, while investment in thermal power has peaked. For thermal power, early investment was concentrated in Southeast Asian countries, which are rich in fossil energy. However, China will no longer build overseas coal-fired power projects due to concerns about global energy transition and economic efficiency.¹⁴ For hydropower, it is the second largest source of energy in terms of the installed capacity of China’s overseas investment projects, mainly because Southeast Asia is rich in water resources and is the location of the middle and lower reaches of many rivers. For alternative energy, leading operators’ existing overseas installed wind and solar power capacity is mainly located in countries with abundant wind resources or ample sunlight and that are making rapid progress in energy transformation. With the implementation of energy transition policies and easing geopolitical tensions, more investment opportunities may emerge for power companies and equipment manufacturers in countries with robust wind and solar resources.

Looking ahead, policy support for energy transition in BRI countries and abundant wind and solar resources may generate more investment opportunities. On the policy side, as BRI countries have generally set guidelines for reducing the proportion of thermal power and increasing the installation of renewable energy facilities, wind and solar power projects will likely increase substantially by 2030. According to the Research on Wind and PV Resources Assessment in BRI Countries released by the Global Energy Interconnection Development and Cooperation Organization (GEIDCO) in May 2022, onshore wind power and solar power projects in BRI countries account for 70% and 76% of the global total. Given the high utilization hours and low development costs for wind power projects in Kazakhstan, Uzbekistan, and Sudan, and solar power projects in Chile, Namibia, and Saudi Arabia, these countries are ideal for renewable energy development.

• (2) Transportation infrastructure projects: Strengthening connectivity and enhancing international influence with infrastructure as a link

We believe the global expansion of transportation infrastructure will help enhance China’s international influence. Transportation infrastructure investment projects under the BRI framework are mainly railway, road, and port projects such as the China-Laos Railway and Phnom Penh-Sihanoukville (PPSHV) Expressway. Compared with projects in the traditional contracting model, investment projects in general involve engagement in front-end investment and development as well as back-end operation and management, and can facilitate the global expansion of related industries. However, transportation infrastructure projects often feature long payback periods and unstable risk-to-reward ratios. The significance of the global expansion of investment projects in transportation infrastructure lies more in strengthening economic and trade connectivity with BRI countries and enhancing China’s international influence through technology “exports” and experience sharing in infrastructure construction.

We analyze the significance of transportation infrastructure investment with the Jakarta-Bandung High-Speed Railway as an example given its important demonstration effect as China’s first overseas HSR project. The Jakarta-Bandung HSR connects Jakarta, Indonesia’s capital, with Bandung, the country’s fourth largest city. It is the first overseas construction project that fully uses Chinese railway systems, technology, and industrial components. According to the president director of PT KCIC,¹⁵ the project is funded by a joint venture between China and Indonesia with a concession period of 50 years, and it could take 40 years for the project to break even. The significance of the commencement of the Jakarta-Bandung HSR lies in the following aspects:

• For Indonesia, the construction and commencement of the HSR will help increase income, create jobs, and boost economic growth in regions along the route. HSR can increase economic benefits and create jobs during the construction stage. In the Jakarta-Bandung HSR project, the total purchase value of raw materials such as steel and cement, as well as machinery and equipment produced locally in Indonesia, was US $5.12 bn. During the construction period, the project created 51,000 local jobs, and it could create 30,000 jobs per year in the service industry after the completion and commencement of the project.¹⁶ The commencement of the railway will also facilitate the flows of people and improved logistics, boding well for the development of industrial parks and boosting economic development in regions along the route.

• For China, overseas expansion of HSR projects can help related industries go global and enhance policy communication and people-to-people connection with Indonesia. The Jakarta-Bandung HSR project is a landmark project for China’s first full-industry-chain expansion overseas, demonstrating that China’s HSR has advantages in terms of technology, cost, and coverage of the entire industry chain, thus having a positive impact on future overseas expansion. In addition, HSR can also drive the global expansion of related industries. More importantly, it can enhance China’s international influence, economic and trade cooperation, policy communication, and people-to-people connection between China and Indonesia.

8.2.3 Operation: Enhancing International Cooperation, with China–Europe Railway Express as a Successful Example

As an international intermodal train project, the China–Europe Railway Express has set a benchmark for China’s active engagement in international cooperation. It runs through nearly 40 countries and regions in Eurasia, including China, Kazakhstan, Mongolia, Russia, Belarus, and Poland.¹⁷ According to China National Railway Group, the number of train trips operated by China–Europe Railway Express in both directions increased from 80 in 2013 to about 16,000 in 2022, and the categories of goods transported expanded from IT products such as mobile phones and laptops to more than 50,000 types of products, including auto and auto parts, chemicals, and grain. The railway has become an effective channel for connecting China and BRI countries, thus facilitating regional economic and trade cooperation as well as cultural exchanges.

Backed by its short transport distance, high speed, and impeccable safety record relative to sea transportation, the China–Europe Railway Express provides a complementary form of transportation. Although marine shipping remains the main mode of freight transportation due to high freight volume and low freight rates, the railway still plays an important role in deepening cooperation between China and BRI countries, and has a notable demonstration effect for international cooperation.

First, the railway sets a benchmark for cooperation and coordination between countries with the use of one single waybill covering the entire journey. International trains travel through different countries, which usually requires different transport documents. As a result, there may be problems such as cumbersome inter-country arrangements and procedures and low operating efficiency. However, the China–Europe Railway Express is characterized by one-off entrustment, one-off quotation, one waybill, and one-off invoicing, which not only mitigates the need for multiple waybills, but also reduces operating time and costs. Unified standards have helped strengthen cooperation and coordination between China and BRI countries.

Second, the railway promotes trade development and industrial agglomeration in hub cities. For example, according to China Railway Group, trains departing from Chengdu and Chongqing accounted for 30% of the total number of trains operated by China–Europe Railway Express in China in 2021, with the value of the transported goods exceeding Rmb200 bn, and trains arriving at Chengdu and Chongqing accounted for 55% of the national total. Therefore, Chengdu and Chongqing handle the largest number of China–Europe Railway Express trips, feature the most balanced distribution of trains and the highest value of goods transported, and have an optimal structure of goods supply.

The China–Europe Railway Express has also facilitated the development of industries closely related to railway transport and the European market, such as electronics, automobiles, and machinery in western China. Commencement of the railway project could help hub cities promote international trade and attract agglomeration of industries through trade.

8.3 Addressing the Challenges for the Sustainable Development of BRI Infrastructure Projects

Some problems still need to be addressed to improve the sustainability of BRI infrastructure construction. Essentially, without comprehensive planning for the implementation of infrastructure projects, there may be a disconnect between policy intentions and corporate actions. As a result, there is room for improvement in co-opetition among companies, as well as in supporting industries and infrastructure. Underdeveloped financing and insurance channels are also one of the pain points in infrastructure project development. In this section, we analyze the current issues to be addressed to support the sustainable development of BRI infrastructure projects.

8.3.1 Further Coordination Between Multiple Parties to Enhance Synergies Between Projects

BRI projects rely on synergies between multiple entities to maximize benefits and bring about sustainable development. On top of the existing synergies, we believe the synergy effect of the projects may increase further if more efforts could be made to improve coordination, including coordination between: (1) Local governments; (2) enterprises; (3) projects and financial institutions; and (4) infrastructure and industrial support.

• (1) Cooperation between local governments in China

Local governments’ active participation and engagement in the development of the BRI will lead to varying degrees of competition in the implementation process, and such competition between local governments has both positive and negative effects. Positive effects might include accelerating the improvement in regional infrastructure and strengthening the ability to handle foreign affairs at local levels, while negative effects could include redundant construction in the absence of effective coordination and excessive subsidies. Despite the achievements that have been made so far under the BRI framework, if local governments make plans that cater to their own needs rather than to the interests of the broader community, this may partially lead to resources being wasted and an oversupply of subsidies.

For example, the China–Europe Railway Express developed quickly after 2016. In 2016, the National Development and Reform Commission (NDRC) announced the development plan for the China–Europe Railway Express over 2016–2020, aiming to increase train trips to 5000 each year by 2020. In fact, according to China Railway Group, more than 5000 trips were made in 2018 (6363), and the number of trips reached 12,406 trains in 2020, equivalent to 248% of the previous target. According to the 2021 China–Europe Railway Express Development Report, the number of Chinese cities covered by the China–Europe Railway Express logistics network rose from 27 in 2016 to 91 in 2021. While the rapid development of this project demonstrates the potential advantages from aligning policy communication standards between China and BRI countries, in-depth coordination between local governments in the operation of China–Europe Railway Express is necessary to help improve the sustainability of the project. For example, hub cities could play a role in driving the shift from “point-to-point” to “hub-to-hub” transport networks, allowing some train routes to be merged, or some to cease operations and exit the project when there are insufficient sources of freight.

• (2) Coordination between companies

Chinese construction companies still have substantial room for improvement in creating synergies with overseas projects. It is still necessary for them to improve the mechanisms for coordination and cooperation in the process of acquiring, undertaking, and completing projects overseas. If Chinese companies can make further improvement in the going global model and in project arrangements, stronger synergies could be created.

The model of “joint global expansion” could develop quickly. Some overseas infrastructure projects (e.g., ports) include a wide range of businesses, involve long periods of project development, and feature complex contractual structures, all of which impose high requirements on companies’ business capabilities and risk-bearing capacity. If it is difficult for a single company to meet the requirements of full-cycle project management, groups of companies may therefore consider “joint global expansion” to leverage their respective advantages and create synergies. If central construction SOEs, local construction companies, and non-state-owned enterprises—which have different competitive advantages—can jointly fund, construct, or participate in the operation of a project and jointly undertake and share the workload and related risks, such a model could help prevent risks, reduce losses, and improve the quality and profitability of the project, in our view.

• (3) Coordination between companies and financial institutions

For companies going global, financing channels for infrastructure projects need to be improved further. The financing cost of China’s overseas infrastructure projects is relatively high as the number of lenders available is limited. Due to the large investments required and long payback periods of infrastructure projects, coupled with the high risks associated with overseas investment, China’s main financing and investment channel for BRI infrastructure projects is loans. According to the State Administration of Foreign Exchange (SAFE) and the AEI, for the financing of BRI infrastructure projects, the value of loans is about twice the value of direct investment, and 80% of the loans are originated by policy banks. Direct investment is dominated by SOEs (61%), while the share for private enterprises is about 30%.

In terms of interest rates, China’s policy banks are able to offer prime lending rates of about 2–3%, while Japan International Cooperation Agency’s (JICA) lending rates are less than 2% at the highest.¹⁸ The main reason for this is that besides the low base rate in Japan, JICA also secures significant funds through government financing and fiscal allocation, which account for about 50% of the total funds, greatly reducing the financing cost.

While Chinese policy banks also receive government-subsidized loans, the proportion of such loans is not high (only about 5%), indicating that there is still a downside for the financing cost. For example, for the Mumbai-Ahmedabad High Speed Rail project in India, China offered loans at interest rates of 2–2.5%, while Japan offered loans at an interest rate of only 0.1% (Fig. 8.6).¹⁹

Fig. 8.6

Source SAFE, AEI, CICC Research

Statistics on China’s investment and financing in BRI countries over 2013–2021. Note China’s direct investment in BRI countries is estimated based on the amount of investment projects over 2013–2021 calculated by AEI, and loans are estimated based on the difference between China’s balance of payments at end-2021 and end-2012; CDB stands for China Development Bank, and CEXIM stands for China Export–Import Bank.

Financing channels for infrastructure projects can be improved in the following ways:

• (1) Diversifying the financing channels

For example, developed economies exhibit certain competitive advantages in cooperation with international multilateral development banks. In Asia, developed countries make full use of the Asian Development Bank (ADB) as a supplementary source of financing. ADB participates in many of their projects and coordinates loan issuance and financing activities, and even offers grants. Although China has stepped up cooperation with multilateral financial institutions such as the Asian Infrastructure Investment Bank (AIIB) in recent years, the country remains a laggard in terms of the number and scale of projects, especially in terms of its influence on financing and lending policies of multilateral banks.

Japan has advanced a series of reforms at the ADB to make better use of its infrastructure investment and financing functions, e.g., consolidating and improving the ADB’s internal infrastructure fund, and establishing various funds such as the Asian Development Fund, the Asia Pacific Project Preparation Facility (AP3F), etc. In addition, Japan expanded financing coordination with governments of other countries, and has worked jointly with Canada and Australia to help the private sector participate in infrastructure projects. It also set up the Office for Private Sector Partnership to strengthen public–private sector collaboration and private financing. These reform measures have further expanded ADB’s financing channels and increased funding support for Japan’s overseas projects.

• (2) Improving the insurance mechanism

Currently, Chinese companies rely on a single insurance channel, with private SMEs having limited access to sources of insurance funds. China Export & Credit Insurance Corporation is the only policy-oriented overseas investment insurance institution in China, and its source of funds is the export credit insurance risk fund, which is supported by government budget. China Export & Credit Insurance Corporation mainly offers insurance policies to large SOEs in China. Although it has ramped up support for SMEs in recent years, data shows that the insured amount for private SMEs via financing credit enhancement instruments remains relatively limited.²⁰

• (3) Develop risk-sharing mechanisms

BRI infrastructure projects generally involve large amounts of financing, but Chinese banks mostly prefer to be the sole lender or to originate loans jointly with two or three banks, while they lack the ability to organize syndicated loans by international banks or other financial institutions. Therefore, Chinese financial institutions usually bear most of the risks. Infrastructure loans in China mainly come from two policy banks, namely the China Development Bank and the China Export–Import Bank. The two banks usually originate loans to BRI infrastructure projects either alone or together with domestic commercial banks. By contrast, developed countries tend to organize syndicated loans offered by international lenders to share risks associated with the projects. Accordingly, Chinese financial institutions bear most of the risks, which imposes higher requirements for project review (Fig. 8.7).

Fig. 8.7

Source CSIS, CICC Research

Comparison of sources of loans for select infrastructure projects in BRI countries.

• (4) Coordination between capacity and infrastructure

Infrastructure construction cooperation could be separated from capacity cooperation. First, BRI countries may launch tenders separately. Second, the coordination mechanism may need to be improved as infrastructure construction and production capacity “exporters” are often not the same entities. For BRI countries, underdeveloped infrastructure and supply chains could restrict their ability to participate in the international division of labor, and they need to improve their infrastructure and value chains to enhance their competitiveness. For “exporters”, the development of regional manufacturing clusters could trigger stronger derivative demand and strengthen their ability to fund investment in infrastructure construction. Therefore, coordination between production capacity and infrastructure construction would be of great significance.

8.3.2 How Can China Replicate Its Domestic Success in Infrastructure Construction in BRI Countries?

Japanese and US experience can serve as a reference mainly from the perspective of other countries’ overseas infrastructure development. As one of the countries witnessing the fastest infrastructure development, how can China “replicate” its success in domestic market in overseas countries?

China has made notable achievements in infrastructure construction. Data from the NBSC shows that China’s highway and railway mileage stood at about 5.28 mn and 151,000 km in 2021 (ranking No. 3 and No. 2 in the world), 100% of urban and rural areas were electrified, and the 4G network covered 99% of the country’s territory. According to the World Economic Forum, China ranked No. 36 globally in terms of infrastructure in 2019,²¹ higher than the country’s ranking for per capita GDP (65th). We believe China’s experience in infrastructure construction can provide a reference for infrastructure development under the BRI framework in three aspects.

First, China’s infrastructure construction in its early stages mainly focused on production-oriented infrastructure (e.g., electricity and transportation), which generated stable profits. Data from the NBSC shows that production-oriented infrastructure accounted for more than 70% of China’s total fixed-asset investment (FAI) before 2008. Thanks to China’s advantages in economies of scale, such infrastructure projects were able to deliver reasonable returns despite undemanding prices. For example, Beijing-Shanghai High Speed Railway’s attributable net profit margin was 36% and ROE was 7.8% in 2019,²² largely comparable to projects of Japan Railways.

Second, infrastructure investment was initially concentrated in developed regions with relatively high population density, before gradually spreading to regions with lower population density. According to the NBSC, the proportion of FAI in infrastructure construction in eastern China stayed above 40% before 2006. In December 2006, the State Council executive meeting deliberated on and approved the Eleventh Five Year Plan for Western Development.²³ After that, the proportion of infrastructure FAI in western China rose 8ppt over 2006–2017. According to the NBSC, the density of HSR (km/sq km) in eastern China was 1.3 and 8.5 times that in central and western China in 2021 (vs. 1.5 and 87.5 times in 2010), and the density of expressways in eastern China in 2021 was 1.4 and 5.4 times that in central and western China (vs. 1.8 and 11.9 times in 2005).

Third, government planning is of great importance. Infrastructure plays a fundamental and leading role in supporting economic and social development, and China’s infrastructure development is in line with the need to ensure national development and security. Chinese ministries and commissions issue guidance on the development of various areas of infrastructure, while local governments release documents to provide overall planning and coordinate with the central government.

8.4 Reflections and Insights

The key to promoting the high-quality development of the BRI is carrying out high-quality projects. In terms of mechanism for and path of development, related parties should adhere to the principle of generating shared growth through consultation and collaboration, and fully leverage the role of the market and companies. At the project level, measures can be taken to adopt high standards, improve quality of life, and pursue sustainable development. Specifically, the following measures can be taken.

First, focusing on key countries, industries, and projects, and channeling resources to develop high-quality projects. Related parties shall determine the general direction of development of BRI infrastructure projects according to the characteristics and needs of the BRI country and to China’s construction-related strengths. Existing facilities, channels, and networks can be fully utilized to drive more resources to the construction of high-quality projects. Moreover, more attention can be paid to high-quality livelihood projects that enhance quality of life, improve the sense of achievement and happiness of people in the host country, and generate both economic and social benefits.

Second, building a mechanism of development that features guidance from the government as well as cooperation between companies. The government is mainly responsible for the top-level design of infrastructure cooperation with host countries, building China’s international reputation, providing information services, and guiding legislation. It encourages, guides, and supports companies’ participation in BRI infrastructure development. The government can also strengthen the mechanism of cooperation and effective guidance of infrastructure projects. Efforts can be made to enhance comprehensive coordination for key countries, industries, and projects, including coordinating government-corporate cooperation (e.g., fully taking into account the interests of enterprises and jointly formulating a cooperation framework), coordinating the co-petition between companies to avoid price undercutting and excessive competition, and coordinating the cooperation of production capacity and infrastructure projects (further improving infrastructure investment blueprints around key regions and industry chains under the overall principle of promoting BRI production capacity cooperation).

Third, improving capabilities of existing insurance institutions and facilitating the diversification of financing channels. First, the insurance capabilities of China Export & Credit Insurance Corporation for overseas investment can be strengthened, and other financial institutions can be encouraged to expand into overseas investment insurance. Second, effort can be made to promote innovative financing models such as PPP and hybrid financing, and to improve the ability to organize syndicated loans from international banks or other financial institutions on the premise of improving the overseas investment protection mechanism.

Fourth, focusing on “soft connectivity” between international rules and standards and national development policies. This includes reducing institutional transaction costs through customs collaboration, mutual recognition of standards, rule bridging, system compatibility, and information sharing. In addition, the technical standards for engineering construction by Chinese firms can be gradually promoted. Given the high market barriers in some developed countries and regions (e.g., Europe), China has been working to play a leading role in establishing standards in less developed regions and gradually become a world-leader in the setting of technical standards.

Fifth, for China–Europe Railway Express, measures could be taken to: (1) Merge some train lines, having hub cities play a bigger role, and transiting from the point-to-point to the hub-to-hub model; (2) formulating and implementing a train line exit mechanism, e.g., allowing train lines to suspend operation in case of insufficient sources of goods, allowing trains to exit a project in case of poor operational performance, etc.; and (3) introducing indicators such as full load rate and tax contribution to improve the evaluation metrics for China–Europe Railway Express—with emphasis laid on boost to local job markets, tax revenue, and industrial cultivation—to encourage the project to focus more on “benefits”.