By Luo Yuze

Research Report Vol.19 No.3, 2017

Infrastructure connectivity is the priority area of cooperation under the Belt and Road Initiative and it decides the progress and success of the initiative. Having a clear thought, making scientific and reasonable plans and adopting strong supportive policies and measures are not only important, but also urgent. The Belt and Road infrastructure connectivity research group under the Development Research Center of the State Council conducted research on critical infrastructure such as railways, highways, ports, electricity, telecommunication and energy pipelines, and studied the cooperation mechanism and path in aspects such as regional economic cooperation, investment and financing support, and capability improvement of the participating entities, with a view to providing systematic, scientific and professional research support for the infrastructure connectivity along the Belt and Road.

I. Importance of Promoting Infrastructure Connectivity along the Belt and Road

1. It’s good for breaking development bottlenecks and accelerating economic development and livelihood improvement in countries along the Belt and Road routes

The backward and weak infrastructure is the main factor that restricts the economic development in countries along the Belt and Road. In those countries, about 500 million people have no access to electric power, nearly half of the population has no access to Internet service, and hundreds of millions of people have no access to safe drinking water. According to the Global Competitiveness Report 2014-2015 issued by World Economic Forum, of the 54 countries along the Belt and Road that have competitiveness data, 40 have the comprehensive basic competitiveness index of less than 5 (about 70 points out of 100), and 50 have a lower infrastructure competitiveness index than comprehensive basic competitiveness index. This means that infrastructure is the weakest of all weaknesses in the series of basic capabilities, including system, infrastructure, macroeconomic environment, health and primary education.

2. It’s good for improving the environment for regional economic and trade cooperation, promoting complementarity and achieving win-win development

Connected and compatible infrastructure is the basic precondition and important condition for trade of goods, capital allocation, flow of personnel and industrial cooperation. According to global experience, the improvement of infrastructure connectivity is indispensable for the deepening of regional economic cooperation. Regional economic organizations such as the EU and ASEAN all issued corresponding plans, design mechanisms and policies to improve infrastructure connectivity, and SCO is committed to facilitating the cooperation in traffic and transportation. Countries along the Belt and Road have great potential for complementary development. The Middle East and Central Asia have abundant natural resources, Southeast Asia, South Asia and Africa have intensive labor force and obvious cost advantage, China boasts a complete industrial system and a vast consumption market, and Europe features advanced economy and technology. After the big network of channels and infrastructure is formed, resources, production, market and technology will be well aligned, and overall arrangements will be made for the land and sea routes. At that time, inland countries can reach out to the sea and coastal countries can expand their economic hinterland, and their interaction and complementarity will revitalize regional economic cooperation.

3. It’s good for making early achievements and consolidating the confidence in the Belt and Road Initiative

(1) Infrastructure construction and connectivity is easy to realize because it adapts to the international trend. There is an extensive consensus in the world, and many regions and countries take infrastructure construction and connectivity as an important area and have put forth corresponding plans. (2) Infrastructure reinforcement fortifies weaknesses and breaks bottlenecks. Once infrastructure is truly connected, it will give a strong boost to the economy and people’s livelihood. (3) China has the strong capability of contracting international projects and guaranteeing project construction. “Built by China” means high performance-price ratio in quality, construction cost and efficiency. In 2016, 65 Chinese companies were listed in ENR, the largest number of all countries. As infrastructure projects are usually of a large scale, profound influence and indicative significance, they are good for consolidating the confidence of all parties in the Belt and Road Initiative.

II. Main Challenges facing Infrastructure Connectivity along the Belt and Road

1. Large capital shortfall and difficult investment and financing

Backward infrastructure is the crucial bottleneck that restricts the economic development and the improvement of people’s livelihood in most countries along the Belt and Road routes, and making up the gap between those countries and the world average level to reach a satisfactory level requires immense investment. The project team predicts that from 2016 to 2020, the infrastructure investment along the Belt and Road will need USD10.6 trillion, averaging USD2.1 trillion per year. Even with economic assistance, those countries won’t be able to meet this demand, which is the reason for the vicious circle of “backward economy - inability of infrastructure investment - backward infrastructure - economic inefficiency - backward economy”. Some countries may have some surplus capital, but it cannot flow to countries lacking in the capital for infrastructure construction for factors such as the lack of smooth investment channels and effective security guarantee mechanisms. The investment and financing difficulties faced by infrastructure construction along the Belt and Road can be summarized as high demand, high risk, high cost and low investment.

2. Poor construction and operation environment and high commercial risks

(1) Political factors exert major impacts. Some regions along the Belt and Road have complicated geopolitical situations and all kinds of conflicts and lack strategic mutual trust, which obstructs mutually beneficial cooperation. Projects already under way are affected by political events from time to time and some key cooperation projects have encountered breach of contract and suspension. (2) Exchange risks are high. The capital market is underdeveloped, marketization is of a low level, regulatory mechanism is incomplete and unsound, macro policies are not coordinated, the ability to fend off external impact is weak, exchange rate fluctuates drastically, and policy intervention is frequent. (3) Legal risks are prominent. The laws and regulations are unsound and vary greatly from one country to another, which easily leads to disputes that are hard to settle.

3. Lack of regional cooperation mechanism featuring full coverage, strong pertinence and restrictive force

Given the vast areas and multiple fields involved in the Belt and Road construction, the cooperation mechanisms that have been established for the initiative are mostly bilateral, and although there are a lot of regional cooperation mechanisms, none of them covers all the areas along the Belt and Road routes. In particular, there isn’t an overall balancing mechanism for the alignment of plans and co-construction of cross-border infrastructure projects, and mechanisms of consultation, investment protection and dispute settlement are not in place yet. As a result, those mechanisms are very weak in coordinating the joint infrastructure construction, standard compatibility, investment security and transportation facilitation along the Belt and Road.

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