One Belt, One Road, Not a Win-Win in the eyes of Developing Countries, Has Begun to Change Course
Many of the developing countries are suffering from China’s imposition of “useless goods” and huge debts.
Article on April 11th, by Shunzo Tsukada
About Shunzo Tsukada (Visiting Professor at Ritsumeikan Asia Pacific University. After a 16-year career in the Ministry of Transport (now the Ministry of Land, Infrastructure, Transport and Tourism) as a policy officer, he moved to the World Bank, where he served as a task manager for transport projects for 12 years, and then to the Asian Development Bank, where he served as a task manager for large-scale infrastructure projects for 8 years. In April 2008, he moved to Ritsumeikan Asia Pacific University, where he teaches. He specializes in social infrastructure development utilizing BOT, PPP, PFI, etc., project finance, international economics, development economics, environmental economics, and carbon credit. His degrees include Doctor of Engineering (University of Tokyo), Master of Business Administration (Cornell University), and Bachelor of Liberal Arts (University of Tokyo).
During the Soviet era, Vladimir Putin was a senior KGB official who later became the popularly elected president of Russia. Now, in order to realize his final ambition, Putin has launched a tremendous experiment: the invasion of Ukraine. His relentless, indiscriminate military aggression from land, sea, and air has drawn thunderous condemnation from the international community, which has now completely isolated Putin from the world community.
An Eastern leader more adept at power struggles would have been more adept at pursuing the same dream. Putin’s strategy is the same one that has been used in his country for thousands of years: go deep, stay quiet, and rise up when the time is right.
This is a “Trojan horse” approach that allows one to penetrate deeper without alarming the other country unnecessarily, as opposed to the rough, bare-knuckled attack that Putin has adopted.
And this leader of the Orient has already begun to realize his dream, taking advantage of the winds from the Silk Road. However, the full picture is sometimes difficult to see from the outside because it is sometimes cloaked in other garments, but now that several years have passed since the start of the project, its true nature is becoming clear. In this paper, therefore, we would like to address this issue and attempt to make the necessary analysis.
Formulation of Countermeasures against One Belt, One Road by Western Countries
Needless to say, the dream referred to here is President Xi Jinping’s “One Belt, One Road” initiative, but Western countries, concerned about the rapid penetration of this initiative into developing countries, launched a series of countermeasures against it last year. The pioneering initiative was the “Build-Back-Better World” concept of the United States, which was announced by President Biden at the G7 meeting on June 12, 2008. The UK followed with its “Clean Green Initiative” on November 1, and the EU announced its “Global Gateway” on December 1.
These countermeasures may differ slightly in wording, but they all aim at the same thing: (i) the pursuit of universal values and (ii) the development of high-quality, transparent infrastructure. President Biden emphasized the significance of these initiatives, as they were formulated by the G7 countries with emphasis on
It has been nearly a decade since the One Belt, One Road initiative was put into place, so why did the G7 countries decide to launch a countermeasure?
It would not be surprising if it was only the U.S., which is in the midst of the U.S.-China confrontation, but even the EU, which has been deeply involved in the One Belt, One Road (two-thirds of the EU member states have already become official partners of the One Belt, One Road), decided to unite to launch a similar countermeasure. Was there some common understanding behind this decision?
To answer this question, this paper will analyze the history of the development of the One Belt, One Road to date, its particularities, and its problematic nature, and will clarify the hidden aim of the One Belt, One Road.
Background to One Belt, One Road
One Belt, One Road was announced about 10 years ago, in 2013, not as a completely new policy, but as an extension of the foreign expansion policy that had been underway since 2001, with a clear framework and a new brand name. It is merely an extension of the foreign expansion policy that has been promoted in 2001.
However, since it was launched at the behest of President Xi Jinping, it differed from the previous overseas expansion policies of Chinese companies and was positioned as a higher-level program in terms of national strategy (at the 19th Communist Party Congress held in 2017, One Belt, One Road was incorporated into the Party Statute, the highest decree of the Party).
Therefore, if we look back a bit at the evolution of China’s overseas expansion policy, we find that until the 1990s, this policy was basically domestically oriented and focused on attracting foreign capital to the country.
After China joined the WTO in 2001, this policy changed to a “Run and Leave” policy that encourages Chinese companies to go into overseas markets and earn foreign currency. This was a landmark decision in that it allowed Chinese state-owned enterprises, which had previously been severely restricted, to expand their operations overseas.
Furthermore, after the global financial crisis of 2008, the government actively encouraged Chinese companies to expand into overseas markets under the “Run and Leave,” and Chinese state-run enterprises were encouraged to make a lot of money in overseas markets.
In 2012, the government announced the “Run Up and Go” policy, which stated that Chinese companies, especially large state-run enterprises, should aim to become world leaders, spurring further expansion of Chinese companies overseas.
In this way, the overseas expansion policy of Chinese state-run enterprises was strengthened step by step, eventually reaching the point where “overseas business should be the core profit-making business of these state-run enterprises.
It can be said that state-owned enterprises, which had long been under strict state control, were unleashed on the Wild West and received the government’s approval to make wild money in the western wilderness. It can be said that the state-run enterprises learned the cowboy business of making big money where they could in overseas markets.
One Belt, One Road: Its Uniqueness
As mentioned above, infrastructure projects undertaken overseas by state-owned enterprises have been promoted under the careful guidance of the Chinese government and are therefore often considered to be a part of China’s economic cooperation.
In the case of normal economic cooperation, projects to be supported are decided through consultations between aid organizations of the two countries, but in the case of One Belt, One Road, Chinese state-owned enterprises are responsible for finding projects, which are then proposed to developing countries and, if agreed, implemented.
The overseas projects of state-owned enterprises are called “foreign economic cooperation” in China, but rather than being economic cooperation projects for developing countries, they are commercial contracting projects paid for by foreign governments or international organizations. This point can also be seen from the fact that in Chinese statistics, overseas projects by state-run enterprises are not classified as “foreign aid,” but as “foreign economic cooperation.
Thus, infrastructure development projects undertaken overseas by state-owned enterprises are contracted projects on a profitable basis, so they are not started without payment from the developing country side. On the other hand, developing countries do not have the large amount of funds that are usually required for infrastructure projects, so they cannot place an order (no matter how attractive the proposal may be). The state-run company is well aware of this point, and if the developing country says “please,” the state-run company immediately contacts the local embassy (Economic and Commercial Office), and through the Ministry of Commerce, the state-owned bank in China is connected, and the loan is realized.
In other words, One Belt, One Road is a unique Chinese overseas infrastructure business in which state-owned enterprises and state-owned banks work in tandem.
Problems Involved in One Belt, One Road
Infrastructure development under the One Belt, One Road initiative is a commercial enterprise in a developing country, and as such, it tends to be profit-driven, which can lead to a variety of local problems. The main problems are listed below.
High cost: Although it is generally understood that projects proposed by Chinese companies are low-cost, the opposite is actually true.
For example, a railroad project in Kenya is said to be three times more expensive than the normal price, and a hospital in Mali, the capital of the Maldives, is said to have cost 2.6 times the normal price. Even if the price increase is not as drastic as this, projects that are 30-40% more expensive are common. For example, the East Coast Railway project in Malaysia was once signed under the previous administration, but the newly elected Prime Minister Mahathir decided that the project cost was too high and renegotiated the contract, successfully reducing the original price estimate by 30 to 40%. In Pakistan, too, the government said that the cost estimate for the ML-1 railroad was too high and renegotiated the project, reducing the original price estimate by 20.6 percent.
The reason why higher costs can be set under the One Belt, One Road project is that the loan from China is tied, and there is no need for international competitive bidding as is usually the case with economic cooperation projects. This means that Chinese companies can set the contract price by including all costs expected to be necessary, without worrying about the prices of other bidders.
Furthermore, even after the construction phase, contractors can request a renewal of the initial contract price as long as they have a justifiable reason, and cost increases in this form are not uncommon.
Imposition of Chinese standards: Contracts awarded to Chinese state-owned enterprises under the One Belt, One Road program are either a type of “turn-key contract” (a contract in which a single contractor undertakes the entire job, from design to construction and commissioning, and delivers the project to the client ready for operation with the turn of a key) or a “turnkey contract” (a contract in which a single contractor undertakes the entire project, from design to construction and commissioning, and delivers the project to the client ready for operation with the turn of a key). Engineering, Procurement, and Construction contract” (a single contract for design engineering, procurement, and construction). Under this contract, the contractor has full control over everything from basic design to detailed design, construction, and delivery, allowing the contractor to proceed with the work in the manner familiar to him in his home country, bringing materials and equipment manufactured in his country directly to the site, and writing up the detailed design so that it can be constructed quickly This is the normal case with economic cooperation projects.
In a normal economic cooperation project, a consultant is first selected to conduct basic and preliminary design, and once the details of the project are finalized, a separate contractor is hired and construction is carried out based on the preliminary design prepared by the consultant. Under the One Belt, One Road initiative, however, Chinese state-owned enterprises will undertake both phases together, and will have the full flexibility to undertake the entire project from project identification, design, construction, and delivery. This allows for rapid project delivery, but the construction process tends to be pro-enterprise and efficiency-oriented, and does not reflect the wishes of the developing country side.
In fact, almost all of the projects under the One Belt, One Road initiative are designed according to Chinese standards, and almost all of the materials and equipment used in the projects are also made in China.
For example, in the high-speed rail project between Bandung and Jakarta in Indonesia, not only the high-speed rail cars but also everything from the communication system to the rails were manufactured in China, transported to Indonesia, and assembled locally. Since the procurement price can be set relatively freely, it is possible to include uncertain costs (such as “tea money” and “palm greasing”), which may later be useful for the “smooth implementation” of the project.
White Elephant” continues to incur huge maintenance costs without generating profits
White Elephant”: As mentioned earlier, state-owned enterprises try to expand their overseas business under the government’s policy of “Run and Leave” and in their eagerness to do so, they often try to increase their own sales by building as large a project as possible and presenting it to developing countries, regardless of the debt-bearing capacity of the developing countries. They often try to increase their own sales.
For example, building a high-standard high-speed railroad through a steep mountainous region for a low-income country like Laos (60% of the total length of the railroad would have to be built as tunnels or bridges, which would obviously incur tremendous costs) is a proposal that only shows off their engineering capabilities. The project is not justified by the size of the Laotian economy (the total cost of the project will reach 40% of the country’s GDP).
The project, once completed, will be a tremendous white elephant because of the huge maintenance and operating costs.
High borrowing costs: It is the developing countries (not the Chinese state-owned companies) that are forced to bear the cost of these bloated projects (not only the original asking price, but also the cost increase for justifiable reasons).
Of course, developing countries do not want to bear such a large amount of cost and hesitate to sign the contract, but if there is a bank that can immediately lend the necessary funds (which is usually difficult to secure), and if the repayment of the loan will not start for several years (a long-term loan usually requires a grace period of about 5 years), the cost of the project will be borne by the developing country.
If the lender of these funds is the World Bank, ADB, etc., the problem is not so big (the lending interest rate of the World Bank and ADB is about 1%. However, if the lender is a state-owned bank in China, the interest rate is high (even the Export-Import Bank of China, which is said to provide loans with a high degree of transparency, charges in the 2% range, and even the China Development Bank, which boasts a lending track record four times that of the Export-Import Bank of China, charges in the 6% range). ), and the borrower will be obliged to repay a large amount of money later on.
Opaque contracts that developing countries want to keep a lid on
Opaque contract clauses: Contracts with China contain many secret clauses. For example, it is not uncommon to find clauses stating that if a developing country defaults, it must transfer its natural resource drilling rights or real estate development rights to a Chinese company in exchange for a debt.
The public is strongly opposed to surrendering resource extraction rights to a foreign country, and this opposition often forces the government to enter into negotiations with China to terminate the contract, only to discover that the penalty to be imposed was set very high. In the end, they have no choice but to give up the contract.
Even if the contract is not terminated, they can still bring an investment dispute to claim that the contract is unfair, but when they try to bring an investment dispute, they find that they have no chance to win because of the contract clause that says “arbitration must be conducted in China and in accordance with Chinese procedures”. In the end, they would give up.
Many of the projects under the “One Belt, One Road” initiative include such one-sided contract clauses, which are in principle kept secret from the public.
The irony is that it is the developing countries that would prefer that these contracts be kept secret. If these confidential clauses were to come to light, the first to be criticized would be the governments that signed these contracts.
Conflicts with local communities: The problems associated with the One Belt, One Road project are not limited to such economic issues, but also extend to social issues. However, foreign economic cooperation includes the provision of external labor, which not only does not create as many jobs as expected by the local community, but on the contrary, brings in large numbers of workers from China (recent projects are increasingly using local workers). (Although recent projects have increasingly used local workers).
These workers may stay on after the project is over (through local engagement, etc.), and many of them may start retail businesses there that have no small impact on the local retail industry.
For example, in the Marshall Islands, a Pacific island nation, it is estimated that 60% of the retail business is run by first- or second-generation Chinese. This is the reason why One Belt, One Road is welcomed by the current administration but strongly opposed by the general public.
The Chinese side has consistently emphasized the significance of One Belt, One Road as a win-win situation for both China and developing countries, but in reality, it has been (i) an opportunity for Chinese state-owned enterprises to increase their contracting business*3 and (ii) an opportunity for developing countries to increase their investment in China. In reality, however, this would bring double or triple benefits to the Chinese side, while bringing little benefit to the developing countries. It is no exaggeration to say that the “win” there belongs entirely to China.
On the other hand, developing countries may argue, “Since they can obtain infrastructure that they cannot build on their own thanks to China’s assistance, isn’t this a win-win situation for them as well? However, if the facilities are too large and more magnificent than necessary, they will not generate profits but only accumulated deficits after completion, which is nothing but loose for developing countries. In addition, if there is an obligation to repay a huge amount of money later on, it is not a win-win situation, but a loose-lose situation for the developing country.
And in most cases, that is the case.
Finally, a course correction.
Although One Belt, One Road has spread rapidly since its introduction in 2013, its investments actually peaked in 2016 and began to decline from 2017. This is partly because the original purpose of One Belt, One Road as an outlet for excess domestic productive capacity has run its course, but it is also because the problems mentioned above have gradually begun to emerge, and host countries have become increasingly wary of the One Belt, One Road project.
The existence of such problems was already recognized by the embassies and foreign ministries, which were in daily contact with the local situation, but their recognition and concerns were drowned out by the Ministry of Commerce, which has overwhelming power within the government (and is the competent authority for the One Belt, One Road project), and did not become the opinion of the government as a whole.
However, these local problems began to be heard by the Party center, and the way forward for One Belt, One Road was reviewed, with instructions from the One Belt, One Road Construction Work Guidance Subgroup, presided over by a senior Party official. The new “National Office for International Development Cooperation” was established under the State Council. The operation of the Office was led by the National Development and Reform Commission, with the participation of the Ministry of Commerce and the Ministry of Foreign Affairs, so that the voice of the Ministry of Foreign Affairs was more strongly reflected within the government departments.
There were also changes in the guiding principles emanating from Party headquarters: at the “One Belt, One Road Construction Work 5th Anniversary Roundtable” held in August 2018, President Xi Jinping stated the need to “change One Belt, One Road into a direction of high-quality development”; and in April 2019, at the second “One Belt, One Road” meeting held in April 2019, President Xi Jinping stated the need to “make a positive change” to “make a positive change” to “make a positive change. At the second “High-Level Forum on One Belt, One Road International Cooperation” held in April 2019, President Xi noted the importance of respecting “international standards” and said that “projects on the One Belt, One Road should ensure commercial and financial sustainability. In response, the government’s screening process for One Belt, One Road projects has been strengthened, and the selection process has been made more rigorous.
At the same time, the scope of investment has shifted from the traditional focus on hardware to a wider range of areas, including information and telecommunications technology and other software. In addition, the private sector was encouraged to participate in the One Belt, One Road initiative, as private firms are the primary source of information and telecommunications-related technology. Furthermore, the scope of support for One Belt, One Road was broadened to include the establishment of “cross-border economic and trade cooperation zones” and the construction of smart cities. The expansion of this support will not be limited to temporary construction workers, but will encourage a wider range of personnel to relocate overseas, thereby strengthening local human networks and fulfilling other functions later on.
Geopolitical Intentions Behind the Scenario
At the beginning of this article, I asked why the Western countries decided to launch countermeasures against the One Belt, One Road initiative one after another last year. Some believe that there was no need for the Chinese government to take a confrontational stance at this stage.
Nevertheless, the reason why the Western countries dared to adopt a hard-line stance at this stage seems to be because they believe that the problems that the One Belt, One Road initiative is causing in developing countries conflict with the fundamental values of the Western countries and cannot be tolerated any longer.
However, it is thought that the Western countries would not have taken such hard-line measures if that were the only reason, but the G7 countries dared to take such measures, and they did so in unison, because they saw China’s geopolitical intentions behind the One Belt, One Road initiative.