One Belt One Road: seven factors to attract private sector investment

Chris Birdsong | 19 Apr 2017 | Comments

One Belt One Road (OBOR) is arguably one of the biggest stories in today’s Asia business sector, covering 60 countries and accounting for about 65 per cent of the world’s population, one-third of the world’s GDP, and about a quarter of all the goods and services the world moves. It consists of the 'Belt', the land-based 'Silk Road Economic Belt', connecting China through to the Middle East and Europe; and the oceangoing '21st Century Maritime Silk Road' that extends through Southeast Asia, the Oceania and North Africa through several contiguous water bodies.

OBOR has the potential to be the world’s largest platform for regional collaboration. The infrastructure projects will stimulate economic growth and build legacy for countries along the way.

How much would such a transformational programme cost?  

It is estimated that the total cost lies somewhere between $4 and $8 trillion US dollars, meaning that realising the full potential of the OBOR initiative is beyond even the investment ability of the Chinese government and institutions, and is therefore going to need significant private sector involvement. 

This, however, means that each element of the initiative needs to have a positive investment case in order to attract financing. Whilst we are already seeing a shift amongst Chinese agencies and institutions towards broader funding avenues such as pension funds, overseas sovereign wealth funds and private equity funds, further private sector involvement is required due to the ambitious scale of the projects.

This brings a range of wider considerations in attracting private sector investment. Whilst it is well known that investment is available in the market, matching this to viable projects is the critical gap that OBOR, like many other major projects, needs to address.

Based on my experiences with Atkins and Atkins Acuity, the advisory business of the Atkins Group, there are seven areas that a private sector investor would consider when an opportunity is presented.

  1. Bankable and technically feasible projects. Detailed feasibility studies and robust business cases are important to attract investors who will often require high quality information on which to base their investment decisions. The effect of poorly thought through and ineffective business cases is profound, resulting in investors, developers and institutions losing confidence in a government’s ability to be an effective business partner. To address this, it requires professional de-risking at the project level, an area in which Atkins has expertise. Early state involvement is key to maximise a project’s benefit, providing more certainty in revenue projections and project input cost, which reflects the complexity in design and construction and the engineering delivery risk. 
  2. Appropriate risk allocation. At the early stage of a project, institutional and public bodies shouldn’t expect the private sector to bear the risk. By providing the right funding to proper project preparation and guarantees can help mitigate the risks to attract private sector investment.
  3. Innovative funding. Governments need to be more open towards achieving a balanced funding mechanism between tax payer pay and user pay. The willingness to pay is key to attracting private investment. Local currency bond markets are also important to funding Asia’s growing infrastructure needs as they avoid currency risk arising.
  4. Affordability. Can the host government, tax payers or end users afford to pay for the charge over the lifetime of the concession? Linking back to the innovative funding models, should the public money rather be used to support project life affordability, than be spent on the investment side and crowd out the private sector?
  5. Institutional capacity in host countries. A system to identify, select and prioritise major projects can effectively shorten the lead-in times of the pipeline. Public sector bodies must ensure they have sufficient capacity within government departments involved in infrastructure delivery, especially if procurement is via public-private partnerships. Atkins Acuity has strong expertise in this area and has worked with World Bank and Asian Development Bank for capacity building in some Southeast Asian countries.
  6. Governance and transparency. Transparent and consistent policies and processes are required across all sectors to provide confidence to investors. A solid regulatory framework, a reliable and consistent judicial system and clear and transparent governance are all important considerations.
  7. Project delivery risk. Overrun on major infrastructure projects is a significant project delivery risk. Not only does it have an implication on project cost, but also has implications on the credibility of the host country, which may result in difficulty in raising investment in the future or at an unnecessarily high premium that affects the affordability of the project. At Atkins, we believe that technology has a major role to play. Digital engineering tools such as BIM can provide vast productivity improvements in design, costing and progress visualisation, providing increased clarity and confidence to help make the decision to invest.

Evidence shows that there is no deficiency in available funds, but there are gaps in bringing bankable projects to the table. In focusing on these seven key areas, we believe we are going to see more infrastructure projects being realised that are crucial to the development of many countries.