The Belt and Road Initiative has become China’s most ambitious foreign trade and investment project in its 13th Five-Year Plan, potentially similar in size to the Trans-Pacific Partnership Agreement, previously proposed by the United States. It aims to build a vast network of transportation and other infrastructure across 65 countries in Asia, Africa, the Middle East, and Europe, spanning 60% of the world’s population, and 40% of global GDP, thereby generating new trade and business for global growth. Potentially, the Initiative could have as much impact on China’s domestic economy, also helping address construction-related excess capacity, as internationally. With total cost said to be at least $1 trillion, the potential funding channels are critical.
China’s official and multilateral financing channels are significant and are already taking shape. China’s sovereign wealth fund has backed a new $40 billion Silk Road Infrastructure Fund, capitalised mainly by China’s foreign exchange reserves. The three main state-owned ‘policy banks’ have targeted about $80 billion for OBOR projects. The Asia Infrastructure Investment Bank (AIIB), and the BRICS’ New Development Bank (NDB) are both expected to play key financing roles, as also are many of China’s provinces and state-owned enterprises. China’s increasing foreign direct investment is increasingly going along the Silk Road.
But even put together, these official and multilateral financing channels are small, relative to the funding needs of the OBOR. Thus, the challenge will be to attract private financing to complement public funds, especially from international pension funds, insurance companies, sovereign wealth funds, and private equity funds, for the cross border investments that comprise the Initiative. This will provide market confidence and liquidity on a sustainable basis, and be particularly important in countries that lack China’s financing strength. In principle, as the Initiative seeks to build new business and market opportunities, this should attract global investors to invest in its infrastructure.
However, infrastructure financing constraints for the private sector are well known. In many emerging countries, such as in Asia, the shortage of capital has not been a problem, given that the region has been a prominent exporter of capital. The reality has been that private institutions have shied away from investing in the more complex, longer-term and riskier infrastructure projects in emerging markets, and only a fraction has come from the private sector. The evidence highlights the critical need to increase the market returns on infrastructure investment, lift the benefit-to-cost ratio above 1.0, and deliver bankable projects that will attract institutional investors.
Other related impediments that have deterred the flow of financing from private channels include restrictive regulatory rulings on investment in infrastructure assets and the absence of an efficient market. On the regulatory side, greater international efforts need to be made to redefine infrastructure as a new asset class and thereby help attract private financing. Indeed, the G20 has been trying to develop new investor-friendly PPP models for infrastructure development in emerging markets.
Hence, the governance framework for the cross-border investments of the Initiative will be critical. This is especially because the nature of the OBOR encompasses multiple stakeholders—with very different economic and political situations—across the envisaged routes.
To deal with the many potential stakeholders, China is working on establishing a formal mechanism for cooperation and coordination of the Belt and Road Initiative across all the countries along the OBOR routes. This will likely need a secretariat drawn from participating countries that will ensure that the Belt and Road projects follow international standards and safeguards, including combating climate change.
Indeed, the Initiative might require several parallel structures and innovative cooperation and financing models, linked to South and East Asia, West Asia, the Middle East and Africa. It should help that the Hong Kong Monetary Authority (HKMA) has launched an Infrastructure Financing Facilitation Office (IFFO) to develop Hong Kong as a fundraising centre for OBOR projects as it has been a hub for China’s inbound and outbound investments.
China’s international governance status is also significant. It could use the Initiative to signal a historic shift in its global role to becoming an international creditor. This will enable China to play a greater role in setting the global agenda for OBOR.
To reinforce that change, China has the strength to repay what it owes the multilateral development banks, thereby also freeing up resources in these institutions to support Belt and Road projects in other countries. Member countries could also be persuaded to expand their contribution to the equity base of the AIIB and related multilateral institutions, thereby giving them enhanced ability to leverage resources and attract private financing.
There is much at stake globally in how China manages its Belt and Road Initiative. The potential implications for China, its neighbours, and a large portion of the world are substantial in many economic, financial, and cultural areas. For the initiative to succeed, a coherent governance architecture will be essential.
Anoop Singh is Distinguished Fellow, Geoeconomics Studies at Gateway House: Indian Council on Global Relations.
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 The vision for OBOR goes beyond infrastructure and envisages closer economic, investment, trade, and financial cooperation, building “people to people bonds,” as explained in Visions and Actions on Jointly Building Silk Road Economic Belt and 21st-century Maritime Silk Road (2015/03/28), issued by the National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, with State Council authorisation.
 See discussion in China’s One Belt One Road: Will it reshape global trade, Mckinsey and Company, 2016, http://www.mckinsey.com/global-themes/china/chinas-one-belt-one-road-will-it-reshape-global-trade
 Recently, researchers from Oxford University released the results of a cost-benefit analysis of 95 road and railway projects completed across China between 1984 and 2008. They found that, while the Chinese usually met their schedules, they did so at the expense of quality, safety, social equity, and the environmental impact. In general, they found that less than one-third had any economic value. Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, “Does infrastructure investment lead to economic growth or economic fragility? Evidence from China,” Oxford Review of Economic Policy, Volume 32, Number 3, 2016, pp. 360–390
 Edwin Truman has discussed the related governance challenges in a briefing by the Peterson Institute for International Economics, China’s Belt and Road Initiative: Motives, Scope, and Challenges, edited by Simeon Djankov and Sean Miner (March 2016, ISBN 0881327158)
 The IFFO has 41 partners so far, including international financial firms, and a number of organizations in China. Details of the IFFO can be found in https://www.iffo.org.hk/docs/default-source/default-document-library/iffo-factsheet_cs6_01_eng.pdf?sfvrsn=2