Silk Road Initiative Offers Economic Benefits from China to Europe

Introduction

In 1948, the US made one of the best and most successful decisions in its foreign policy history. It approved the Marshall Plan to fund the reconstruction and development of post-war Europe. Total funding reached $13 billion, more than $150 billion in today’s terms and more than five percent of US GDP at the time. This sum was in addition to $13 billion that had already been spent on reconstruction efforts between the end of the war and the launch of the Marshall Plan. The US continues to reap the benefits of the Plan to this day, with Europe its closest ally in the world.

In the early 1990s, the EU made some of the best and most successful decisions in its history, allocating billions of dollars to support investment and growth in Eastern Europe. The initiative led to the creation of Pre-Accession Funds and to the availability of EU Structural Funds for new member states. Since the fall of the Berlin Wall, the European Union has invested €20-50 billion a year into Structural and Cohesion Funds to integrate the countries of Europe and create the world’s largest economy, not to speak of the prevention of regional conflicts and terrorism.

In 2013, President Xi Jinping of China outlined a bold and ambitious vision for infrastructure development. The “One Belt, One Road” (OBOR) Initiative includes the Silk Road Economic Belt and the Maritime Silk Road, referencing the extensive trade routes that dominated medieval trade between East and West.

Photo: Marko Djurica—Reuters

These infrastructure initiatives encompass an impressive array of investments, including transportation, energy and telecommunications, to foster economic development and improve relations across Eurasia. The Initiative faces major political, technical and financial challenges but offers even greater potential benefits.

Building on Existing Initiatives

For sure, OBOR benefits from previous and existing efforts to integrate regions between China and Europe.  The Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 11 countries and six multilateral development partners working to promote development through cooperation, leading to accelerated economic growth and poverty reduction.  Since 2001, it has mobilized nearly $30 billion in transport, trade, and energy infrastructure investments.

The Transport Corridor Europe-Caucasus-Asia (TRACECA) established an Intergovernmental Commission and Permanent Secretariat to support the development of multimodal transportation networks throughout the region.  They are currently focused on implementing their strategy to integrate the corridor into the growing Trans-European Networks (TEN).

The European Bank for Reconstruction and Development (EBRD) was established in 1991 to support the transition of Central and Eastern Europe to a market-based economy.  The Bank has played a vital role in this transition and delivered on its promise of improved services and quality of life for the region’s population. Based on this success, the Bank has extended its reach, to Mongolia in 2006, to Turkey in 2009 and to the Middle East and North Africa in 2012.

Just this year China joined the EBRD as a shareholder. EBRD financing supports an impressive range of projects from the Oyu Tolgoi copper mine in Mongolia to upgrading Jordan’s wastewater treatment infrastructure to accommodate the influx of Syrian refugees to restructuring the Greek banking sector. The Bank lent a record €1.4 billion to Central Asia last year and another record €9.4 billion in total.  It is now a consummate Silk Road institution.

The Asian Infrastructure Investment Bank (AIIB) was launched at the beginning of this year with initial capital of $100 billion.  Its primary focus will be investments along the Silk Road.  It already has cofinanced projects with existing multilateral institutions such as the Asian Development Bank (ADB), International Finance Corporation (IFC) and World Bank.

Partially in response to AIIB’s launch, ADB has expanded its operations.  Fiscal year 2015 was a record for funding approvals: $27.15bn a 20% increase over 2014. Disbursements also increased 20% compared to 2014.  In the same year, ADB issued its largest ever bond: $3.35bn, 3-year benchmark with coupon at 1.375%.  It has created 130 new staff positions.

Key Countries

Kazakhstan already is one of the most active participants in the program, for obvious geographic reasons. The initiative will dovetail with its existing $33 billion State Program of Accelerated Industrial & Innovative Development. Kazakh Railway has pledged $44 billion separately to reduce travel times from China to Germany by four days. China and Kazakhstan signed joint deals worth more than $20 billion in March, including a dry dock on the border between the two countries at Khorgos.

Photo: Getty Images

While Kazakhstan’s geographic position on the Silk Road is pivotal, Iran is nothing less than the keystone of the Silk Road, hence its importance to the initiative and the timeliness of its rapprochement with the international community.

China is already a key economic partner of Iran and has previously supported investments by Tehran Metro and Iran Railways, including the Tehran-Mashhad high speed rail project. Kazakhstan also recently inaugurated a rail link to Iran.  EBRD recently expressed its readiness to support the North-South project to link Iran to Russia via road and rail.

Afghanistan is destined to benefit as much as any other country from the lifting of sanctions against Iran.  Earlier this year, India announced plans to invest $500 million in the Chabahar port project.  This would provide a key contribution to developing the Hajgak iron ore mine in Bamiyan project, an investment of more than $10 billion, including rail links between Chabahar and Bamiyan.

In turn, these rail investments would help link the country to other transportation corridors, including the recently inaugurated Turkmenistan-Afghanistan railroad that is planned to connect to Tajikistan.  Long-planned projects such as Central Asia-South Asia power project (CASA 1000) and the Turkmenistan–Afghanistan–Pakistan–India (TAPI) Pipeline may also benefit from increased infrastructure investment.

Photo: AP

Afghanistan and other countries in the region are likely to benefit from increased competition from various donor and investor countries as Chinese interest in the region increases.  This is similar to what has occurred across Africa over the past decade as the US and European countries increased their investments to match those from Chinese sources.

In the Caucasus, Georgia and Azerbajian stand to gain immensely from the development of these new trade routes.  Azerbaijan in particular will host the crossroads of the North-South route as well as the Silk Road paths that cross Kazakhstan and the Caspian Sea and continue on through Georgia and the Black Sea.

Earlier this year, the Anaklia Development Consortium (ADC) was awarded contract to build $2.5bn deep sea port in Anaklia, Georgia.  ADC is JV between TBC Holding of Georgia & Conti International of the US. Moffatt & Nichol & Maritime & Transport Business Solutions are also on the team.  The project expects to make use of financing from AIIB, among other sources. The port will have the capacity to process 100 million tons of cargo per year, which could boost Georgia’s GDP by 0.5% APM Terminals is simultaneously expanding Poti Port on Georgia’s Black Sea Coast.

Pakistan was one of the first countries to benefit from China’s new Infrastructure Diplomacy with the China-Pakistan Economic Corridor (CPEC), a $46 billion program of investments focused on power and transportation. The effort will link Gwadar Port in Pakistan via road, rail and pipeline to China’s western border.

One of the first projects financed in the Corridor is the Karot Hydropwer Plant, a $1.65 billion, 720MW, 30-year build-own-operate-transfer project. This is the first project to be financed by the Silk Road Fund, launched this year specifically to support the initiative. It is initially capitalized at $40 billion and issued its inaugural bond issue in June 2015 for $4 billion. The International Finance Corporation is expected to co-financed the Karot Hydropwer Plant with additional financing from China Exim Bank and China Development Bank.

Conclusion

Silk Road initiatives are to be applauded as they envision the integration of Eurasia like never before. China and its ever-growing list of partners have a real interest in developing the region and seeing it thrive beyond narrow security interests. The new and growing interest from China will only invite more investment and support from the US and other donor and investor countries.  Adopting participatory and collaborative approaches will help to ensure the success of the initiative.

Claret Consulting and its partners, including BACCI, are collaborating on the Silk Road Investment Forum to be held in London on 6-7 April 2017.  The event will bring together some of the leading voices and thought leaders on the Silk Road and the great opportunities that the region offers to the world. To become part of the most significant infrastructure investment initiative in modern times, register now for the Silk Road Investment Forum in London 6-7 April 2017:

Brien Desilets is the Founder and Managing Director of Claret Consulting.  For nearly 20 years, he has advised clients in the public and private sectors on infrastructure management and finance, economic development and related topics. He has worked and led programs with world bank, Development Bank Associates, American Councils for International Education, Fannie Mae Foundation, Calvert Group, Radian Guaranty, Norwegian Sovereign Fund, Elliot Management Corporation, USAID, the Alaska Industrial Development and Export Authority (AIDEA), US Federal Highway Administration (FHWA) and European Bank for Reconstruction and Development..  

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The views expressed by the author do not necessarily reflect the views and policies of the CSA BUSINESS.