Op/Ed by Chris Devonshire-Ellis
One of the conundrums our team of adventurers is going to come across on their epic adventure is understanding the apparent ambivalence of the European Union to China's Belt & Road Initiative. Only a handful of EU countries have signed the Chinese MoU proposing co-operation, while many members, including the UK have been downright hostile in rejecting the offer to get onboard.
Infamously, and just a few weeks ago, Germany's respected Handelsblatt Global magazine released a report stating that all of the EU Ambassadors to China, with the sole exception of Hungary, had signed a letter condemning the BRI, an unprecedented move to have taken.
Examining the content of the letter however is revealing. The basic grievances stem from the view that the BRI is a vehicle for "China wanting to shape globalization to suit its own interests. At the same time the initiative is pursuing domestic political goals like the reduction of surplus capacity, the creation of new export markets and safeguarding access to raw materials.” it read. They warned that "European companies could fail to clinch good contracts" if China isn’t pushed into adhering to the European principles of transparency in public procurement, as well as environmental and social standards.
Basically that means that the EU Ambassadors want EU contractors to have a level playing field when competing with Chinese contractors for infrastructure development contracts. Or even better, for EU contractors to take all contracts that involve EU money. While on the face of it, this doesn't seem unreasonable, taking this position alone does have inherent problems.
Firstly, the Chinese are extremely competitive, price-wise, and often rather more experienced in building infrastructure. An example is the contract awarded to China's Road & Bridge Corp to construct the Peljasac Bridge, a vital link across the Croatian Peninsula. EU funds are paying for the €350 million project. Upon winning the bid however, an Italian/Turkish consortium and an Austrian contractor complained that the Chinese bid was unfair as it was from a state-owned company and therefore probably subsidized. The complaint was in fairness rejected - but only after exhaustive enquiries and time delays. In fact, it turned out that the China Road & Bridge Corp are a subsidiary of the China Communications Construction Company. Their annual report (2016) can be viewed here. The company is listed in Hong Kong, is audited by Ernst & Young, declared profits of just under €400 million for the financial year (meaning they are contributing to funding the Chinese state, not the other way around), and has superlative experience of building some of the world’s longest and technically advanced bridges. They also provided the most competitive bid. The inference is that certain elements within the EU wish EU taxpayers money for the building of infrastructure to only be awarded to European contractors, even at a higher cost. However, I doubt very much whether the average EU taxpayer cares who builds the bridges we use. I suspect they prefer value for money and a damn good bridge. It will be interesting to learn if our adventurous colleagues also come across such militant attitudes: "EU money for Europe!"
The other issue I have with the current EU attitude is the short term viewpoint concerning the Belt & Road, and the apparent concentration purely on project participation. This is where the EU political make up tends to rub up against China’s longer term view concerning the one party state. Democracy is not an entirely satisfactory political system when it comes to forward planning. Its very nature demands constant change and innovation, which works well at some times but rather poorly at others. The political nature of European democracy dictates short-termism, and especially when matched with the financial demands of capitalism. Consequently the ever-needed desire for increased quarterly profits on publically-quoted companies and an entire system and attitude becomes hooked to short-term gains.
The Chinese view is rather more pragmatic. Without the need to worry about being turfed out of office, longer term, more ambitious projects can and are being developed; the Belt & Road Initiative is a good example of this. Yet the short-termism of the EU regards it as an implied threat, a desire to wrest control of Europe away from Brussels. Yet there is no doubt that a lot of the infrastructure build China is involved in and proposing along the BRI is also badly needed.
There are however deficiencies within the Chinese One Party model as well. The CPC has 1.3 billion citizens to keep happy. With no opposition, the Government quickly comes under fire should things begin to go awry. In China’s case, that means those millions of Chinese tourists who are now acquiring a taste for the previously exotic. Yet the EU, when it comes to Chinese developing infrastructure, tend to see the trains and boats and lorries and planes as only there for delivering Chinese manufactured goods to Europe. They have, for the large part, failed to understand that the Chinese domestic consumer market is also growing. There are 600 million Chinese online consumers today, a figure that will double by 2025. Yet the EU attitude towards accessing this huge market has been inconsistent.
The remaining issue with the EU’s concentration on ensuring that projects go to EU contractors is really another form of short-termism. The Chinese have already shown they are competitive and experienced and will compete for infrastructure project tenders. Sums in the hundreds of millions and even billions are being bandied about. It’s of course logical for EU contractors to want to bid and win some of these. However, the EU’s view remains stuck at that level: the Belt & Road Initiative is about competing for contracts. It is a lazy view. There are entire new industries worth far more than construction projects that can be built on the back of Belt & Road Initiative infrastructure.
As I mentioned, and to paraphrase Deng Xiao Ping, it doesn’t really matter who builds a bridge as long as it’s a good bridge. What really matters then is the infrastructure exploitation opportunity.
Yet the EU is not considering or studying this properly. It is a strategic mistake.
Foreign investors interested in the Belt and Road must learn to exploit the infrastructure, and not necessarily participate in it. By this, I mean studying the impact of infrastructure developments, be they roads, bridges, ports, airports, rail, and so on, and measure the trade impact of these. An example is Sri Lanka’s Hambantota airport. It has been criticized already as a white elephant, and is massively underused. But as I explained here, that has been due to local political rivalries delaying its use, and not the underlying development benefits the airport will bring. In fact, the new airport, situated on the southeast coast of Sri Lanka, shaves off 30-40 minutes flying time from flights arriving from Asia (the existing airport in Colombo is on the Western coast), and cuts an astonishing 3-5 hours drive time to reach the excellent beaches and safaris that the southeast coast has to offer.
Although Sri Lankan companies were not really involved in the infrastructure development of the airport, (the Chinese did that, surprise, surprise) the entire regional economy is going through a boom. The airport will eventually open, and foreign investors are already entering the local market to prepare themselves. This includes Shangri-La Hotels, who have just put in a luxury spa and golf resort in Hambantota itself – the largest single luxury development on the island as well as Canadian developer Pura, and their new eco resort at Trincomalee. The Marriott have just opened an exclusively Chinese tourists hotel at Weligama while Starwood are also looking at investing in more properties, including Pasikuda on the east coast, which the Hambantota airport will service. These are just a few. There are many others, not least the smaller investors putting in boutique hotels and spas.
Added to this, the local construction industry, civil engineers, architects, interior designers, and everyone from speed boat manufacturers to the textiles industry, dive masters, and chefs and everything one can imagine is related to the tourism industry is having a field day in Sri Lanka. In short, forget about who built the airport. Look at the tourism and supporting industries that go along with having such a facility. In fact, Sri Lanka’s tourism figures are already going through the roof as the country starts to position itself as the new Bali. I have first hand knowledge of this, I maintain a winter house there and own a small boutique hotel in the area. The current boom in Eastern Sri Lanka is down to Chinese infrastructure investment – both the Southern Expressway and the new Hambantota Airport. Without the Chinese BRI investment, the entire sector would still remain much as it was – moribund. As we can see from the graph below, tourist arrivals have been skyrocketing. The number coincide with new infrastructure build.
There are numerous other examples, scattered around Europe, Asia, Africa, and beyond. The message then is crystal clear – the way to get involved in China’s Belt and Road Initiative is to look at the opportunities it creates and then exploit them.
However, there is a disconnect between many public and private sectors in various countries in generating the intelligence needed to understand the potential of such infrastructure developments. The public sector has been concentrating its efforts at getting contracts as part of China’s infrastructure build. The private sector has grown frustrated waiting for progress. But that’s the wrong approach. The public sector needs to be examining the infrastructure projects China is building, and working out what the trade development impact will be. That intelligence then needs to be fed to the respective private sector companies. What is required is more imagination, not demands for contracts to build things.
Those Chinese tourists of today I mentioned earlier, are tomorrow’s new EU product consumers. The hard infrastructure is being built and will continue to be built to interconnect Europe with Asia, yet the soft infrastructure has largely been ignored by many governments. Alibaba, however, has been very busy sealing agreements with countries such as Italy, Denmark, and New Zealand among others to promote better sales of goods to Chinese consumers online. Yet, not all countries have recognized this opportunity, and even less have been especially active in educating the private sector about how to take advantage of selling to China. The EU SME Centre did produce a small booklet on the subject, yet that was based on 2013 China consumer demographics, is out of date, and in any event, China has amended its e-commerce laws for foreign participation since then. The EU itself has not kept abreast of the challenges and opportunities presented to EU SME’s by helping them sell to the Chinese consumer market – a direct by-product of the Belt and Road. Instead, they’ve issued a letter criticizing the entire initiative. As I have said previously, such an attitude is myopic.
Clearly, this stance needs to change. The Belt and Road is not going to provide a windfall for global foreign MNC’s hoping to become involved in China’s infrastructure projects. Those will be mainly shared with local contractors on an as need basis. But where the big opportunities lie are in the benefits the Belt and Road infrastructure build will bring. That is where public money should be spent, in order to help the private sector understand where the opportunities lie. The exciting part about that is they provide for longer-term sustainable industry developments, are not exclusive, anyone can participate, and you don’t have to engage with the Chinese.
Infrastructure projects are big-ticket, one off items. The development of entire industries as a result remains the more attractive, sustainable option, and Belt and Road policy makers should be looking at where those opportunities are, not concentrating solely on the infrastructure projects themselves.
It will be interesting to note how the members of The New Silk Road Project are able to reconcile this with the current short term policy of aiming to be seen to be winning BRI construction projects when competing with Chinese contractors.
Chris Devonshire-Ellis is an advisor to the New Silk Road Project and will be providing commentary on the political and trade aspects of China's Belt & Road Initiative as the team members move along their journey. Contact him at email@example.com or visit www.silkroadbriefing.com