Lessons from Europe for Belt and Road: Private involvement can’t be taken for granted

‘The Trans-European Transport Network Executive Agency was created by the European Commission in 2006 ... Yet, private involvement in the projects has been very limited until today’

PUBLISHED : Saturday, 22 July, 2017, 11:01am
UPDATED : Saturday, 22 July, 2017, 11:01am

The “Belt and Road Initiative” proposed by President Xi Jinping in 2013 is called the “project of the century” and involves major land- and maritime-based infrastructure projects in about 70 countries across Asia, Africa and Europe. Some consider the initiative a “loosely defined framework” and are concerned about the speed of implementation. International experiences with large-scale infrastructure initiatives indicate that private company involvement can play a crucial role for project selection and implementation.

The routes under the initiative cover more than 62 per cent of the world population, currently accounting for about 30 per cent of global gross domestic product and more than 35 per cent of global merchandise trade. And Hong Kong’s private companies in various sectors – banking, construction, infrastructure investment, project planning and development, consultancy, etc – have developed close business relationships with many belt and road countries in the past. So, one would think that they should waste no time in taking up the “super-connector” roles to partner with investors, intermediaries and project owners worldwide to take advantage of the opportunities from the initiative. But experiences with large-scale cross-border infrastructure projects elsewhere indicate that the involvement of private companies cannot be taken for granted.

An example for such a major infrastructure project is the Trans-European Transport Network. This European endeavour was formally recognised in the Maastricht Treaty in 1992 and included “30 priority projects” of particular importance and significant size (for example, 18 are railway projects, three are mixed railroad projects, two are inland waterway transport projects, one project refers to motorways of the sea). The purpose is to support the functioning of the internal market by removal of infrastructure bottlenecks and the use of environmentally friendly transport modes. the completion of these priority projects is planned for 2020. Two lessons may be drawn from this transport network:

Lessons learnt for implementing Belt and Road Initiative

First, private involvement in infrastructure projects cannot be taken for granted. Only three of the 30 priority projects had been completed by the end of 2003 and there were growing concerns at the time that, at the experienced rate of investment, completion would take too long. In response to these concerns, the Trans-European Transport Network Executive Agency was created by the European Commission in 2006 and called the Innovation & Networks Executive Agency since 2014. Its tasks include the technical and financial implementation of the projects covered by the network over the projects’ entire lifetime and the execution of the network’s budget. One of the benefits of such an agency is that it can reduce investment risks and thus making it more attractive for private companies to participate. Yet, private involvement in the projects has been very limited until today. This is true despite the fact that a special loan guarantee instrument was established in 2008 to offset early-period risks of demand and revenue uncertainty.

Second, a cost-benefit analysis can help identify and evaluate project proposals, and private involvement should be encouraged. The selection of the 30 priority projects are supposed to have net socioeconomic benefits and to be of common interest. The latter part, common interest, is of particular importance because it means that projects could be desirable from the European perspective, while they may not be desirable from the individual country’s perspective. Another possibility is that projects are desirable from the individual country’s perspective but are not of common interest in the sense that they may achieve little positive socioeconomic impact beyond the country’s national borders. The selection of such projects of little common interest is frequently called “pork barrel” politics. This is a term used to describe local investments that are mainly used to secure funding from a higher governmental organisation, which is the European Union in the case of the Trans-European Transport Network.

Economists indeed found that only some priority projects in the network may generate a net economic gain and that even fewer projects are of common interest. In their study, they concentrated on a selection of 22 out of the 30 priority projects.

The conclusion: only 12 passed an elementary efficiency test and that only five out of these 12 projects can be considered of common interest in the above-mentioned sense. To improve project selection, they recommend to make use of cost-benefit analysis followed by peer review and publish the results prior to project selection. They further recommend to concentrate on projects of common interest.

Another possibility to improve project selection and implementation is to make better use of the expertise of local private companies as well as industry and commerce federations. Private companies are likely to possess an intimate understanding of local infrastructure needs and they should be encouraged to help identify valuable common interest projects that otherwise would remain uncovered.

Hong Kong-based firms and organisations with their close business relationships to the belt and road countries seem particularly well equipped to play a major role here. But again, private involvement cannot be taken for granted because common interest projects may not be commercially sustainable without proper support from the government. The pursuit for commercial gains is understandably crucial for private companies. Yet, if the belt and road countries, especially those in the developing stage, do not put in place efficiently common interest projects that contribute to their sustainable developments, in the longer or even medium term, these so-called new markets nowadays could hardly flourish, let alone be profitable, for any foreign investors.

As shown by the European example, the support for private companies will need to go beyond institutional arrangements as well as loan guarantees to be effective. In fact, substantial financial support will be required to ensure significant private-sector contributions to projects of common interest that can be vital for the success of the Belt and Road Initiative.

Achim Czerny is associate professor at the department of logistics and maritime studies and a member of the belt and road centre of the faculty of business at the Hong Kong Polytechnic University