How the Gulf has emerged as a key part of China's Belt and Road Ini­tia­tive


Gulf Business - - FRONT PAGE - By Robert An­der­son

WHEN CHI­NESE PRES­I­DENT Xi Jin­ping first un­veiled the Belt and Road Ini­tia­tive (BRI) in Septem­ber 2013, few imag­ined the role the Gulf coun­tries would play.

Ma­jor in­fra­struc­ture projects ap­peared cen­tred on routes that seemed to al­most skip the re­gion en­tirely, while some ques­tioned whether a group of coun­tries with tra­di­tion­ally close re­la­tions with the United States would em­brace a ri­val su­per power.

Five years on and the re­gion is emerg­ing as one of the most im­por­tant partners in a pro­ject that en­com­passes 65 coun­tries with more than 30 per cent of global gross do­mes­tic prod­uct, 62 per cent of the pop­u­la­tion and 75 per cent known en­ergy re­serves.

Ini­tial projects spear­headed un­der the BRI in­cluded Oman’s Duqm, which the sul­tanate is trans­form­ing into a ma­jor port and in­dus­trial zone with the help of up to $10.7bn in in­vest­ment from a Chi­nese con­sor­tium. The UAE and China also signed an agree­ment to launch a $10bn strate­gic co-in­vest­ment fund in De­cem­ber 2015 and in Septem­ber 2016 China’s Cosco Ship­ping Ports was awarded a con­ces­sion agree­ment to op­er­ate Con­tainer Ter­mi­nal 2 at Abu Dhabi’s Khal­ifa Port for 35 years. Five Chi­nese com­pa­nies have since pledged to in­vest $300m in the at­tached in­dus­trial zone while Bank of China has said it will pro­vide fi­nanc­ing to Chi­nese firms that es­tab­lish op­er­a­tions there.

But it has been over the last 12 months that the GCC’s re­la­tion­ship with China on the pro­ject has truly taken a step for­ward.

Jin­ping pledged $20bn in loans and $106m in fi­nan­cial sup­port to the Mid­dle East at a con­fer­ence in July and fol­lowed it with the first visit by a Chi­nese leader to the UAE in 29 years.

That trip saw more than 13 deals signed, from the ap­proval of the first Chi­nese sta­te­owned fi­nan­cial ser­vices firm to set up in Abu Dhabi Global Mar­ket, to a $1.6bn hy­dro­car­bon sur­vey con­tract awarded to China Na­tional Petroleum by Abu Dhabi Na­tional Oil Com­pany. A deal be­tween DP World and Zhe­jiang China Com­modi­ties City Group to jointly de­velop a new Traders Mar­ket at the Jebel Ali Port and Free Zone set the tone for a Silk Road that is in­creas­ingly mov­ing in new di­rec­tions. Among them, a mem­o­ran­dum signed be­tween Kuwait and China last month to co­op­er­ate on the $86bn Silk City pro­ject, which will span 250 square kilo­me­tres across five is­lands and in­clude a high­way link to Kuwait City, ma­jor port and hous­ing for 700,000 peo­ple. Dis­cus­sions are also tak­ing place to link Kuwait with a planned net­work of rail­ways from China to Europe.

“We’re start­ing to see over the last 12 months a grow­ing num­ber of Chi­nese EPC con­trac­tors pre­pared to take eq­uity stakes in projects not just in power but other sec­tors,” says Ben Simpfendor­fer, founder and CEO of ad­vi­sory firm Silk Road As­so­ciates

He be­lieves the ma­jor­ity of re­gional op­por­tu­ni­ties un­der the BRI are ex­pected to be in just five coun­tries – with a $4.5 tril­lion mar­ket spread across Turkey ($794bn), Saudi Ara­bia ($707bn) and the UAE ($407bn) among other coun­tries. While Turkey, the UAE, Saudi, Pak­istan and Egypt ex­pected to re­main pri­or­ity mar­kets go­ing for­ward.

Chi­nese firms sold more than $110bn of en­gi­neer­ing pro­cure­ment and con­struc­tion (EPC) con­tracts to the Mid­dle East and Pak­istan be­tween 2014 and 2016, with the ma­jor­ity of re­gional BRI projects in the 2013/2017 pe­riod in trans­port (26 per cent), power (20 per cent), man­u­fac­tur­ing (12 per cent) and real es­tate (15 per cent).

“There has been a change in in­vest­ment pat­terns, we’re start­ing to see grow­ing flow into man­u­fac­tur­ing – con­struc­tion of in­dus­trial parks,” Simpfendor­fer says.

As this change oc­curs, Chi­nese in­vest­ment un­der BRI con­tin­ues to surge.

In the first half of the year, Chi­nese en­ter­prises signed 1,922 new con­tracts for projects in 61 coun­tries amount­ing to $47.8bn – an in­crease of 18 per cent on the same pe­riod last year, ac­cord­ing to Acad­emy of China Coun­cil for Pro­mo­tion of In­ter­na­tional Trade fig­ures.

Mean­while, Chi­nese bank­ing in­sti­tu­tions have par­tic­i­pated in 2,700 projects over the last three years by pro­vid­ing credit worth nearly $400bn.

“The fun­da­men­tal prin­ci­ple is to con­nect, co-con­struct and co-share based on bi­lat­eral con­sen­sus dur­ing the con­struc­tion process,” says the acad­emy’s di­rec­tor of in­ter­na­tional in­no­va­tion and re­search divi­sion Liu Yingkui.

Power plays

Among the key ar­eas of fo­cus for China’s BRI plans in the Gulf and wider Mid­dle East are in the area of power gen­er­a­tion – where new so­lar projects and other en­ergy diver­si­fi­ca­tion plans present op­por­tu­ni­ties.

This was part of the agenda at the China for the World En­ergy In­fra­struc­ture Co­op­er­a­tion Fo­rum, which was or­gan­ised by US multi­na­tional Gen­eral Elec­tric (GE)

“En­ergy in­fra­struc­ture projects will be a shin­ing point for BRI go­ing for­ward talk­ing about third party mar­kets,” China Cen­ter for In­ter­na­tional Eco­nomic Ex­changes (CCIEE) vice chair­man and deputy ex­ec­u­tive of­fi­cer Wei Jian­guo said at the event.

“In Abu Dhabi we’re go­ing to build a 1,177MW so­lar en­ergy pro­ject and also we have large projects in other coun­tries, so lay­ing even more of a foun­da­tion for en­ergy projects.”

The afore­men­tioned Swei­han plant be­ing de­vel­oped by a con­sor­tium of Ja­pan’s Marubeni Corp and China’s JinkoSo­lar Hold­ing with Abu Dhabi Wa­ter & Elec­tric­ity Au­thor­ity (ADWEA) is among the world’s largest so­lar plants and sched­uled for com­ple­tion in the sec­ond quar­ter of 2019

The win­ning bid­ders of­fered to pro­vide elec­tric­ity for 2.42 cents per kilo­watt-hour, one of the most com­pet­i­tive prices seen in the so­lar in­dus­try. Down the road in Dubai an­other key pro­ject is tak­ing place in part­ner­ship with Chi­nese com­pa­nies.

The Hassyan clean coal plant is be­ing de­vel­oped by a con­sor­tium of Saudi’s ACWA Power, Dubai Elec­tric­ity and Wa­ter Au­thor­ity (DEWA) and China’s Harbin Elec­tric with GE en­vi­ron­men­tal control

sys­tems and tur­bines. Chi­nese banks are pro­vid­ing Two thirds of the $3.4bn fi­nanc­ing.

The 2,400MW pro­ject is de­scribed as the first coal-based power plant in the Gulf re­gion and will op­er­ate in com­pli­ance with emis­sions and en­vi­ron­men­tal stan­dards for fuel gas plants, while meet­ing 25 per cent of grid re­quire­ments.

The first phase com­prises four units of 600MW net power, with each to be op­er­a­tional con­sec­u­tively in March 2020, March 2021, March 2022 and March 2023.

Un­der the terms of the con­tract, the con­sor­tium signed a 25-year power pur­chase deal to sup­ply power at a lev­elised tar­iff of less than 5 US cents per kWh and is re­quired to se­cure the de­liv­ery of coal.

“Power de­mand is still grow­ing pretty fast in the Mid­dle East whether that’s driven by pop­u­la­tion growth, in­dus­tri­al­i­sa­tion or plants to di­ver­sify away from oil,” says GE Power com­mer­cial gen­eral man­ager Dr Sacha Parneix.

“What we can see to­day, how­ever, is a shift from the gov­ern­ments on in­fra­struc­ture projects to­wards pri­vate owned or pub­lic pri­vate part­ner­ships.”

“That’s where I think China can play an im­por­tant role in fa­cil­i­tat­ing these projects.”

The Belt and Road back­lash

While these projects are key ex­am­ples of Mid­dle East­ern coun­tries work­ing with China for ma­jor in­fra­struc­ture projects, coun­tries in other parts of the world have ex­pressed reser­va­tions about the BRI agenda.

In South­east Asia in par­tic­u­lar, sev­eral coun­tries now doubt the vi­a­bil­ity pre­vi­ously agreed mega projects as new ad­min­is­tra­tions take an in­creas­ingly crit­i­cal view.

In Malaysia, the ad­min­is­tra­tion of Prime Minister Ma­hathir Mo­hamad has post­poned a pre­vi­ously agreed KualaLumpur Sin­ga­pore rail pro­ject over cost con­cerns and can­celled the Chi­nese-funded $20bn East Coast Rail Link.

Else­where, Pak­istan’s new gov­ern­ment un­der Prime Minister Im­ran Khan is re­ported to be re­think­ing an $8.2bn rail link link­ing Karachi to the north­west­ern city of Peshawar and push­ing for a re­view of other projects. In par­tic­u­lar, of­fi­cials are ex­plor­ing fund­ing op­tions that de­part from the tra­di­tional BRI lend­ing model where host nations take on Chi­nese debt to fi­nance con­struc­tion, ac­cord­ing to Reuters.

Sim­i­lar con­cerns have been noted for de­vel­op­ments in Sri Lanka and the Mal­dives and have forced China onto the de­fen­sive re­gard­ing one of the key prongs of its for­eign pol­icy.

At the Asia-Pa­cific Eco­nomic Co­op­er­a­tion (APEC) sum­mit in Pa­pua New

Guinea last month, Xi Jin­ping de­liv­ered a speech de­fend­ing the BRI say­ing it was “not a trap as some peo­ple have la­belled it.”

The United States, mean­while, has ar­gued to the con­trary.

In com­ments in a speech mo­ments af­ter Jin­ping’s, US Vice Pres­i­dent Mike Pence warned against projects backed by Chi­nese loans say­ing the United States “doesn’t drown our partners in a sea of debt” or of­fer “a con­strict­ing belt or a one-way road”, ac­cord­ing to Bloomberg.

Simpfendor­fer says along with po­lit­i­cal un­cer­tainty in some coun­tries, this per­cep­tion is­sue is among the largest chal­lenges fac­ing BRI projects go­ing for­ward.

“Chi­nese par­ties need to partner with lo­cal com­pa­nies and en­sure all par­ties will ben­e­fit, other­wise po­lit­i­cal op­po­si­tion to Chi­nese par­tic­i­pa­tion will grow,” he ar­gues.

Khalid Man­soor the chief ex­ec­u­tive of Hubco, which is work­ing with China Power In­ter­na­tional Hold­ings Lim­ited on a 1,320MW clean coal plant in Balochis­tan, Pak­istan due to open next year, says coun­tries also need to ad­dress a per­cep­tion that Chi­nese com­pa­nies are be­ing given pref­er­ence for BRI projects.

“It is more of a mis­con­cep­tion and there is a need to re­ally alleviate this con­cern. From my per­spec­tive it is a very trans­par­ent in­ter­na­tional bid­ding process. If the Chi­nese can com­pete the oth­ers also can com­pete.”

More broadly, he sug­gests more could be done to ex­plain the knock-on ben­e­fits of projects of the wider China-Pak­istan Eco­nomic Cor­ri­dor for Pak­istani work­ers and busi­nesses, even if Chi­nese com­pa­nies have won many of the con­tracts.

“When the cor­ri­dor is com­pleted that road is go­ing to pass through spe­cial eco­nomic zones and that’s where the op­por­tu­nity is. Some in­dus­try could be lo­cated within those spe­cial econ­omy zones - but most im­por­tantly this kind of part­ner­ship be­tween Chi­nese and Pak­istani com­pa­nies could be used to de­velop ex­port op­por­tu­ni­ties and de­velop op­por­tu­ni­ties for the youth of Pak­istan.

“These kinds of as­pects should be kept un­der con­sid­er­a­tion - that would re­solve a lot of po­lit­i­cal is­sues.” Parneix, whose com­pany GE has worked with Chi­nese EPCs to de­liver more than 35GW of power to de­vel­op­ing mar­kets and has a fur­ther 20GW un­der­way, says a shift away from tra­di­tional gov­ern­ment fi­nanc­ing mod­els could help ad­dress the is­sue.

And he be­lieves this is in­creas­ingly be­ing seen in the Mid­dle East with the growth of projects launched un­der the in­de­pen­dent power pro­ducer model, which sees build­ing and fund­ing han­dled by pri­vate sec­tor partners.

“The com­mit­ment of the coun­try in some cases to pur­chase the power over a cer­tain amount of time is very good for the coun­try,” he says.

“The coun­try will pay as it is us­ing the elec­tric­ity over a long pe­riod of time and the pri­vate sec­tor firms will take the load of in­vest­ment and man­ag­ing the debt for that spe­cific pro­ject.”

The July ac­qui­si­tion of a 24 per cent stake in the $3.87bn fourth phase of the Mo­hammed Bin Rashid So­lar Park in Dubai by China’s Silk Road Fund shows some in­di­ca­tion of the di­rec­tion the BRI may take in the fu­ture.

And with a host of other projects and part­ner­ships in the works, from hous­ing to bi­lat­eral trade, tourism and in­vest­ment, it ap­pears the Mid­dle East’s role in the ini­tia­tive ap­pears only set to grow in the fu­ture.

Chi­nese firms sold +$110bn of en­gi­neer­ing pro­cure­ment and con­struc­tion (EPC) con­tracts to the Mid­dle East and Pak­istan be­tween 2014 and 2016

Chi­nese in­vestors check the model of the dry dock in the Omani port city of Duqm

Jebel Ali Port and Free Zone

The Hassyan clean coal plant

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