Belt and Road: Opportunities to serve the greater good

9 Oct 2018

Worldwide, the construction sector consumes about half of the planet’s raw-material output, and 80 per cent of its minerals production. Large-scale infrastructure projects as a result carry substantial environmental responsibility. As Environmental, Social and Governance (ESG) factors assume ever-greater importance in investment considerations, addressing those concerns will be crucial if the Belt and Road Initiative (BRI) is to succeed in marrying economic growth, social mobility and sustainability. 

Sustainable infrastructure has been a consistent theme in Chinese President Xi Jinping’s statements on BRI. The Chinese government has issued official guidance on “Promoting the Green Belt and Road”, drawn up a BRI Ecological and Environmental Cooperation Plan and approved financing principles for BRI developments that outline the need to strengthen project sustainability. By 2020, all listed Chinese companies must by law account for the environmental and social impact of their operations. 

At the end of 2016, China’s Ministry of Environmental Protection signed an MOU with the UN Environment Programme on “Building a Green Belt and Road”. That partnership is expected to culminate this year in the formation of an international coalition to fully integrate green goals into the BRI. 

Of course, setting these goals is much simpler than meeting them, especially in developing countries. China learned from the 2009 cancellation of the Myitsone dam project in Myanmar that failing to conduct proper environmental and social risk assessments places entire projects and international relationships in jeopardy.  

Though it can’t be ignored that BRI-financed projects still include coal-fired power plants, prompting questions about the initiative’s stated commitments to sustainability, progress has been made. The Silk Road Fund, for example, helped finance a domestic-waste-to-energy project in Vietnam that collects 650 tonnes of household refuse a day and uses it to generate 60,000,000 kWh of green power a year. Under BRI, clean energy projects are also being supported in Pakistan, Laos, Myanmar and several African countries.  

A sustainable Belt and Road

Green finance is becoming steadily more influential in the BRI, and China is playing a prominent role in this trend. Approximately USD37 billion worth of green bonds were issued in China in 2017, compared with almost zero two years earlier, and the People’s Bank of China (PBOC) has been working with the European Investment Bank to strengthen the green finance framework.  

“Greening the Belt and Road” – a collaborative project between the Green Finance Committee of the China Society for Finance & Banking, the City of London Corporation and Renmin University in China – is working towards the establishment of a market for green BRI financial instruments, which it said in a white paper would increase opportunities to “price BRI projects at all phases” and reduce financing costs. 

The challenge at this stage of the BRI is that there is no single set of agreed principles that define a green investment.  

There are a variety of green-bond metrics: the PBOC’s Green Bond Guidelines, the Green Bond Principles overseen by the ICMA and the Climate Bond Standards supervised by the CBI. Just as the development of BRI trade routes has the potential to harmonise customs, legal and technology regimes to smooth commerce (link to Article 5), the initiative creates an opportunity to standardise green principles and enable investors to focus on project pricing and financing.  

The growing trend of green finance gels with policies already being implemented at international commercial lenders like Standard Chartered and multilateral development banks, six of which have signed MOUs with China’s Ministry of Finance formally agreeing to support the BRI. Examples include: 

• The Asian Infrastructure Investment Bank is developing a policy framework it describes as “lean, clean and green”. 
• The Asian Development Bank in 2013 set a target that half of all its operations should have “environmental sustainability as a theme”.  

• The European Investment Bank wants to allocate 35 per cent of its loans to climate-action projects in developing countries by 2020.  
• The New Development Bank (NDB)’s BRI lending portfolio has focused largely on clean energy and sustainable infrastructure (see table).  

Advancing social mobility, spreading prosperity 

As the map of the world becomes increasingly dotted with giant BRI infrastructure projects, a common criticism has been that imported Chinese labour absorbs a lot of the opportunities the initiative creates. 

In the first years of BRI, that impression was cemented by enormous armies of workers that descended from China into developing countries.  

The evidence suggests otherwise. In countries such as Kazakhstan, which is hoping to lure companies like Toyota, DHL and Alibaba, quotas ensure a majority of employees are local. At the Khorgos Gateway in the east of the country, investments are creating jobs and engendering social mobility, so that sons and daughters of market traders and farmers are now trained to operate one of the world’s most sophisticated dry ports. 

In Pakistan, 7,000 Chinese workers were employed to help build China-Pakistan Economic Corridor, but jobs were also created for 35,000 Pakistani personnel. In Georgia, three-quarters of the staff running Hualing Group’s free industrial zone in Kutaisi – on the site of a derelict Soviet car factory – are local Georgians. While China COSCO Holdings’ takeover of Piraeus port, in Greece, was initially met with protests, container volumes grew fourfold in five years through 2017, reviving a struggling facility in a debt-stricken economy. 

As China grows wealthier and wages rise, importing workers makes less and less economic sense, and Chinese projects across the BRI are creating more opportunities for local workers. 

“In addition to the jobs associated with directly constructing and operating a new infrastructure project, ancillary knock-on benefits to economies are significant,” said Sarmad Lone, Regional Head Corporate Clients for Africa and the Middle East at Standard Chartered. “A new road, for example, creates efficiency gains arising from shortened travel time while also increasing connectivity and trading along its route. Infrastructure has been and will continue to remain a critical component of the base on which social mobility and economic prosperity are built.”

Across the BRI, projects have acted as a catalyst for local employment, stimulating local economies and social mobility, often in regions where opportunity was stagnant. The more that green finance underpins the BRI investments that create these opportunities, the more that sustainability will underpin the initiative as a whole.

This article was also published on Bloomberg.com.