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Politics

China must play fair over BRI contracts

UK right to withhold its approval until Beijing makes the rules transparent

British Prime Minister Theresa May with Chinese President Xi Jinping ahead of their meeting in Beijing on Feb. 1.   © Reuters

British Prime Minister Theresa May upset her Chinese hosts last week by refusing to endorse President Xi Jinping's signature foreign policy effort, the Belt and Road Initiative. She called the U.K. a "natural partner" for the BRI, but suggested that it failed to meet international standards for transparency and fair competition.

This is a principled and pragmatic approach that more countries should strike. If BRI is to work, both China and partner countries must gain. Both Chinese and non-Chinese companies must have the chance to compete for the multi-billion dollar contracts.

Our research supports May's concerns. Out of all the contractors participating in Chinese-funded transportation projects tracked by the CSIS Reconnecting Asia Project, 89% are Chinese companies. In comparison, out of the contractors participating in projects funded by the World Bank and Asian Development Bank, 29% are Chinese, 40.8% are local, and 30.2% are foreign. Further research is needed to investigate other projects types, as well as competition for providing related services, but these initial findings should give policymakers pause.

Realities on the ground are at odds with official Chinese rhetoric about openness and inclusivity. As Xi Jinping said in 2015, "In promoting this initiative, China will follow the principle of wide consultation, joint contribution and shared benefits. The programs of development will be open and inclusive, not exclusive. They will be a real chorus comprising all countries along the routes, not a solo for China itself." Belt and Road statements are filled with references to "community," "common destiny," and "shared interests."

But foreign companies are treated differently and typically face three major barriers to participating in the BRI. To start, they need timely and accurate information about business opportunities. Despite all the attention the BRI receives, reliable project information is notoriously difficult to find. When projects are announced, it is often too late in the process for companies to bid. If China is serious about the BRI being an open effort, it will work to increase project transparency.

To be fair, China is not the only beneficiary of BRI's opaque financing arrangements. Infrastructure projects are often used to reward domestic political constituencies. Witness the proliferation of Chinese-funded projects in Sri Lanka's Hambantota district, a stronghold of support for then-President Mahinda Rajapaksa. Countries not participating in the BRI can and should voice their concerns, but ultimately, it will be up to recipients of Chinese funding to demand greater transparency.

After identifying opportunities, companies face an uneven playing field. Chinese firms are highly competitive in many infrastructure activities. That is why they are heavily involved not only in Chinese-funded projects but also World Bank-funded projects, as the CSIS data shows. This edge can be seen globally as well. Last year, seven out of the world's 10 largest construction companies by revenue were Chinese.

China has also taken a page out of last century's development aid playbook, requiring that recipients use Chinese contractors. This "tied" aid, long used by developed economies to boost their own exports, has declined globally over the last two decades. In response to pressure from international rights groups, and evidence that such practices are inefficient, OECD members have taken steps to untie aid. China is not an OECD member, but will face political pressure to revise its practices, especially given the size of its growing aid footprint.

But leveling the playing field will not happen easily or, realistically, anytime soon. China's construction titans have benefited from generous state subsidies. Different methods for estimating project costs and revenues can also favor Chinese groups. Governments will be tempted to work harder to favor their own businesses. They should work together to establish common standards and principles for infrastructure.

Companies will also consider partnerships with Chinese counterparts. A few firms that have been successful in participating in Chinse-funded projects have done so through joint ventures. The upside potential is market access and more opportunities to participate as subcontractors. The downside risk is intellectual property theft. During her visit, May rightly raised the need for better IP protection. European and Japanese companies that made deals to sell their high-speed rail technology in China are now competing against their former junior partners.

Building "hard" infrastructure is the more visible aspect of the BRI, but is it hardly the only area for competition. Chinese activities beyond its borders also open opportunities for consulting, legal advice and other services. Foreign companies may have more success in the BRI's "soft side," especially those with experience operating in business environments where Chinese groups are still acclimatizing. As more projects are completed, there could also be "second wave" opportunities for companies offering different products and services that rely on the infrastructure already put in place.

Finally, even if opportunities are identifiable and competition is fair, a host of risks can outweigh the potential rewards for companies. Elections, corruption, complicated land rights and other political and legal risks can threaten a project's viability. Funding risks arise from the capital-intensive nature of infrastructure projects, long repayment schedules and the challenges that developing economies might encounter along the way. When projects are completed, weak demand and other operational challenges remain. These risks are why institutional investors, such as pension funds and insurance companies, rarely venture into infrastructure outside OECD economies.

China has been willing to go where others have not, but it will need others to succeed. The BRI has enjoyed relatively rapid and wide support, particularly in Asia. However, its political future depends on implementation and delivering economic results. To sustain support for the BRI, China should be looking for opportunities to broaden participation. More can be done to address other concerns as well, including those about social and environmental safeguards, and standards that relate to the quality of infrastructure.

It also falls to China's partners, those who have signed up to the BRI as well as those that have not, to shape how the effort unfolds. It is possible to do business with China by focusing on specifics and without endorsing the BRI writ large. During May's visit, the U.K. and China signed several commercial deals. Many of these even fall into sectors often mentioned under the BRI's broad banner. A principled and pragmatic approach does not mean blanket opposition, but holding the BRI to international standards and checking lofty promises against facts on the ground.

Jonathan Hillman is director of the Reconnecting Asia Project at the Center for Strategic and International Studies in Washington, D.C. Find him on Twitter @HillmanJE.

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