The scope of the Belt and Road (BNR) program is unprecedented. It aims to link many of the economies of Asia and Europe and reach out to others. Trillions of dollars will need to be invested over a period of several decades. Linking many diverse economies will need to deal with many risks and uncertainties. It is not possible to anticipate all of the problems that will arise, but they can be overcome by governments which are committed to development and cooperate flexibly to achieve a shared vision.

 

If the Belt and Road is implemented efficiently, many economies can become deeply integrated and successfully engaged in global value chains. By the middle of the 21st century, the quality of physical, institutional and people-to-people connectivity among at least some the countries participating in the Belt and Road could be comparable to the 2016 links between the Pearl River Delta and Hong Kong.

The Chinese Government has moved swiftly after announcing the Belt and Road initiative in 2013. Up to USD 1 trillion has been earmarked for investments. China is also leading the decision-making, based on bilateral agreements with other governments. Many early investments are already under way, building on and improving existing infrastructure. As explained in the Action Plan on Belt and Road Initiative published in March 2015 investments in physical connectivity are to be backed up by policy development and capacity-building to make international commerce among Belt and Road economies cheaper, easier and faster, including cooperation to strengthen institutional and people-to-people linkages.

China’s decisive early leadership has been essential and welcome. Investments in transport, communications and energy networks are already generating an early harvest of mutual benefits. Now some momentum has been generated, the time has come to build the foundations for sustainable cooperation. Political leaders and officials need to come together to think creatively about:
a) managing a transition to shared leadership of a process based on mutual benefit, mutual trust and mutual respect among a very diverse group of countries;
b) making collective decisions about the scope of the investments that will be needed to achieve the vision;
c) reaching agreement on priorities and on medium and longer-term targets
d) dealing with many risks and uncertainties;
e) mobilising the massive financing that will be needed;
f) sharing responsibility for efficient project design, construction, operation and maintenance.

1. Connecting Belt and Road Economies
The Belt and Road vision extends well beyond investment in economic infrastructure. The 2015 Action Plan sets out five dimensions of connecti-vity:
a) policy coordination;
b) high quality transport, communications and energy networks to facilitate international commerce;
c) reducing the cost and risks of trade and other international economic transactions along su-pply chains;
d) financial integration;
e) people-to-people bonds.
There is excellent potential for synergy from making simultaneous progress along all of these indispensable dimensions. For example, good com-munications and mutual trust among institutions along Belt and Road corridors will be needed to design, finance and implement investments in new networks, institutions and skills – then to operate new facilities efficiently. And forging people-to-people bonds may be the best way to foster mutual trust and mutual respect.

2. Principles for Successful Cooperation
The Belt and Road process links participants that differ greatly in the size of their populations and economies with different forms of governance, institutional development and productivity. Sever-al decades of experience of economic cooperation show that successful and sustained cooperation among such a diverse group should be voluntary, based on principles of openness, transparency, mutual benefit, mutual trust, mutual respect, and careful evolution.

The guiding principles set out in the 2015 Action Plan on the Belt and Road Initiative are based on this essentially Asian mode of internati-onal cooperation – they are also the fundamental guiding principles of the Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC) process.

All countries are invited to join the Belt and Road process, respecting each other’s sovereignty and the paths and modes of development chosen by different countries. Cooperation is to be based on dialogue to ensure that the interests of all partic-ipants are accommodated. Cooperative arrange-ments and investment are to abide by market rules and international norms and designed to lead to mutual benefit. The challenge for the coming years is to put these sound guiding principles into practice.

2.1 Openness
The global economy is now highly integrated, so openness is essential. The current participants of the Belt and Road already account for 55 percent of global GNP and 70 percent of the world’s population. Their links to the rest of the world are, in many cases, just as strong as their links to participants in the Belt and Road initiative. Therefore, the physical, institutional and people-to-people networks created by the Belt and Road should be designed to strengthen, not weaken, their connections the rest of the world.

Openness can also guide the design of particular investments and cooperative arrangem-ents. It is not realistic to expect all members of a large and diverse group to participate in all arrangements for cooperation. Some may not be ready for, or interested in some specific ar-rangements, for example, to harmonise banking regulations or to facilitate easier international movement of people. But others can set examples for them and make sure that the arrangements they pioneer are genuinely open to others. Then, the first movers should help and encourage to join these arrangements. Such a process of open regionalism can flourish alongside many other processes of regional economic cooperation and can become a precedent for global economic integration.

2.2 Transparency
A lot of information is available about the 1000 or more projects already under way; however, it is not comprehensive nor readily available. The Belt and Road program needs to be supported by a publicly available knowledge-sharing platform that sets out:
a) what projects are under way or committed;
b) how they are being financed, constructed and operated;
c) whether expected targets for completion and performance are being met.

Such transparency will not be achieved easily, but it is vital. Mutual trust among the very diverse group of countries participating in the Belt and Road process depends on sound understanding of how decisions are being made, whether projects are being financed and implemented efficiently and whether adequate attention is being given to how costs, as well as mutual benefits, are being shared.

A ‘hub-and-spokes’ model of management may have been necessary to launch the Belt and Road initiative, but it should not be expected to continue. The time has come to move towards shared leadership. Belt and Road governments need to begin wider and regular consultations to make well-informed decisions about the evolution of the process. Creating and strengthening mutual trust needs to ensure that even the smallest participants can help shape Belt and Road networks.

The nature of cooperation and governance does not need to be defined in detail at the outset, but allowed to evolve in a pragmatic way. As Belt and Road economies become more integrated and interdependent, it will be essential to agree on more policy norms, for example to manage transport, communications and energy networks. It may also be useful to agree on some rules for managing some of the flows of products, people, capital and information, where global rules are not yet adequate. But it is not feasible, nor necessary to try to anticipate all of the understandings and ag-reements that may be needed as the Belt and Road process evolves.

If investments in hardware and software are carefully designed to deliver shared benefits, then the Belt and Road process can develop successfully as a process of voluntary cooperation. Practical cooperation - to finance and operate infrastructure and to implement mutually beneficial cooperative arrangements - does not need to wait for the negotiation of elaborate formal treaties; nor should it be delayed in an attempt to create a supra-national authority to impose conditions for par-ticipation.

3. Implementing the Belt and Road
The success of the Belt and Road initiative will depend on the willingness of participating go-vernments to work and learn together to design, then implement the policy frameworks and insti-tutions needed to create enabling environments for business that can make it possible to finance, construct, then operate improved transport, com-munications and energy networks.

It is relatively easy to build roads, bridges, ports or power stations. But it is hard to ensure efficient operation and adequate maintenance. Some of the greatest gains from cooperation among governments and the private sectors of Belt and Road participants are likely to flow from improving regulatory environments, including growing respect for sound legal systems. Sharing information, experience, expertise and technology among the very diverse group of Belt and Road countries will be essential to create the human and institutional capacity for efficient project design, construction, operation and maintenance. The high levels of performance needed to ensure Belt and Road investments are commercially viable will also require incentives for efficiency.

Sound planning is certainly desirable to help ensure that investments in transport, communi-cations and energy links fit into coherent networks. But it is not possible to set out a detailed master plan for several decades ahead, setting out how thousands of investments in hardware and software are to be sequenced, financed, constructed and operated.

There are far too many uncertainties about new technologies that will become available and, of course, about the future policy decisions of many governments. It may even become necessary to find routes through Belt and Road networks to bypass countries which are not yet able to ensure safe and efficient links with, or through, their territories. They should not be by-passed per-manently. Other Belt and Road participants can help them to acquire the skills and institutional capacity to participate in more cooperative arrangements as soon as they perceive their pot-ential benefits.

This paper presents realistic options for planning and implementation in an uncertain environment, with emphasis on flexibility-learning from experience to find ways to reduce uncertainty and risk. Governments will need to work together to devise long-term strategies for financing and efficiency – they will then need to adapt these strategies when problems, including many unexpe-cted problems, need to be solved.
Monitoring the experience of project design, construction, operation and maintenance is an essential ingredient of progressively better plan-ning. Objective assessments of why some early projects meet expectations, while others do not, can lead to better selection, preparation and successful operation of Belt and Road projects.

4. Financing Investments
It will be very hard to finance investments in economic infrastructure, institution-building and skill development along Belt and Road corridors. The number of participating countries continues to grow, so it is not possible to know how much will be needed. Current estimates indicate that the investment needs for the Belt and Road could be in the order of US$15 to US$20 trillion up to 2030, and more is likely to be needed in later years.

There is wide consensus that it will be necessary to attract private investment to finance on a very large scale. The challenge of attracting more private investment to finance Belt and Road investments, much of which will be in public goods, has been studied extensively. However, there is no solution in sight to overcoming the correct perceptions of the high risk of investing in economic infrastructure, especially in developing economies. Unless that problem is solved, the Belt and Road vision will not be realised.

4.1 Sharing costs and benefits
Many of the Belt and Road projects will provide domestic or international public goods, so governments will need to contribute a significant share of the financing. Except for China, most participating governments have a limited capacity to invest in infrastructure.

Early investments in developing Belt and Road economies are being financed by generous lending from Chinese sources that have accepted the repayment risks. This approach has generated much needed momentum by delivering rapid and visible economic gains, but China cannot be expected to continue to carry this financing burden indefinitely.

To facilitate cooperation based on mutual respect and a right to shared leadership (as distinct from the donor-recipient relations), all Belt and Road participants will need to take responsibility for a gradually greater share of financing. Project risks are also more likely to be lower if governments have a substantial financial stake in the success of projects located in their countries.This points to an urgent need to improve the capacity of all Belt and Road economies, including many developing economies, to find ways to mobilise resources for investment in their economic infrastructure.

 

4.2 Widening the sources of financing
China is already helping to widen the potential sources of financing, especially by setting up the Asian Infrastructure Investment Bank (AIIB). That decision can be expected to generate support for bankable Belt and Road projects from other multilateral development banks. However, development banks alone will not be able to finance the trillions projected to be invested in better connectivity among Belt and Road economies.

Adequate global savings are available in the trillions of dollars of savings accumulated by sovereign wealth funds and institutional investors. However, only a very small proportion of these savings is being invested in economic infrastru-cture, due to the perceived high risks of investing in infrastructure, which include:
a) uncertainty about the policy environment of many economies;
b) inadequate project preparation;
c) long lead times; and
d) difficulty of predicting costs and demand.

Some, so-called, public-private partnerships (PPP) have been set up. However, this approach has proved disappointing, with most of the risks imposed on governments, inflated financing costs and unaffordable user charges.

This report proposes a more entrepreneurial approach to catalyse private sector investment in infrastructure projects, including in developing economies. The strategy is based on some precedents, to ensure that projects are selected and structured in ways that satisfy both public policy and commercial objectives – so that private capital can be attracted at a reasonable cost (measured in both user charges and debt servicing terms). Different types of capital are then matched differ-ent to different phases in the project development cycle:
a) while risks are high during the early stage of project origination and structuring, the costs are a very small share of total costs, so relatively low-cost public funding should be used.
b) a mix of public funding, development bank finance and private capital (in various forms) should be used for the medium-risk constr-uction phase.
c) low-cost private capital can then be introduced after projects are up and running with a proven revenue stream and established cost structure, when the project risks are significantly derisked;
d) public funds released by this refinancing can then be recycled into new projects, thereby relaxing public sector and development banks’ financing constraints.

4.3 Catalysing private sector investment in infrastructure
Innovative arrangements will be needed to take good project ideas from selection through structuring and construction to successful operations. Small teams of publicly-funded and privately-managed professionals – catalytic enterprises – with the right combination of skills (including engineering, policy-making, negotiating and risk management skills) and carefully designed incentives can drive projects through the develop-pment cycle.

A modest amount of public funding will be needed to establish these catalytic enterprises – for example, a small fraction of the $40 billion Silk Road Fund would be sufficient to steer a significant number of Belt and Road projects to successful operations.

The main financing burden comes during construction, before private sector investment can expected. This challenge can be met by setting up a government-owned, autonomously managed holding company along the lines of Singapore’s TEMASEK, a government sponsored, commercially managed investment company. Such a holding company would be able to:
a) channel construction finance drawn from various sources to catalytic enterprises when they succeed in bringing projects to financial close; and
b) pool the risks by financing a portfolio of properly designed and structured projects at a holding company, rather than an individual project level
c) once projects are up and running (thus significantly de-risked) mobilise large scale private investment to re-finance the establish-ent costs, then recycle capital into new projects.

The holding company would need to undertake borrowing, but the amounts required would again be much less than the size of the Silk Road Fund. In the Belt and Road context, borrowing would probably have to be sourced from Chinese sovereign bonds in the early years. Once the holding company succeeds in leveraging private sector investment in economic infrastructure, including from institutional investors, it should be able to service early borrowing and be able to diversify its sources of finance.

This strategy can lead to a gradual transition away from heavy reliance of Chinese financing, making it possible for all participants to make progressively more meaningful contributions to the costs as well as benefits of better connectivity.

5. Towards a Seamless Regional Economy
The prospects for attracting investment in the transport, communications and energy networks needed for the Belt and Road will be boosted if these assets are operated efficiently. Indeed, the highest returns will come from upgrading the capacity and performance of existing assets, including existing roads, ports and airports.

In this age of digitisation, the most significant gains in efficiency are likely to be from investm-ents in the skills and institutional capacity to install and operate software systems. Some Belt and Road economies are already using modern software and exchanging data that optimises the efficiency of transport and energy networks and allows the clearance of people and products across international borders without any need for time-consuming inspections. These pathfinding count-ries will benefit from sharing the information, experience, expertise and technology to help others adapt already proven systems to their operating environments, generating significant positive network effects.

There are many win-win opportunities for voluntary cooperation to allow people, products and information to flow along value chains faster, more securely and at lower cost. These include preclearance of products behind borders and a Belt and Road Travel Card based on APEC’s successful APEC Business Travel Card. Most of these opportunities for mutually beneficial cooperative arrangements depend on effective policy coordi-nation among institutions and on establishing and retaining mutual trust. And almost all of them rely on collecting and sharing essential information.

The technology needed for low-cost access to the internet already exists. Access to information will also depend on policies to ensure adequate competition among service providers. Current concerns about content, privacy and where data is stored impede the flow of data. These problems can be overcome in time if mutual respect and mutual trust among Belt and Road participants is progre-ssively improved. The success of the Belt and Road program will depend on ensuring that data can flow smoothly among all of their economies and connect them to the rest of the world.