Special Monthly Round-up: BRI 1.5

The 2nd Belt and Road Forum in Beijing ended with a set of software patches to BRI 1.0

The 2nd Belt and Road Forum ended on Apr 27 with one message that everyone watching seemed to have picked up: change is needed. In the official parlance of the Chinese government, change is expressed in terms of traditional Chinese painting: from a big stroke, impressionist approach (大写意) to a style of precision and craftsmanship that focus on minute details (工笔画). In the words of Christine Lagarde, the head of IMF, change means “BRI 2.0”, with a focus on increased transparency, open procurement with competitive bidding, and better risk assessment in project selection. And in the words of Pakistan’s Prime Minister Imran Khan, a recipient country leader, change points to a new phase of the signature China-Pakistan Economic Corridor (CPEC) that places “greater emphasis on socioeconomic uplift, poverty alleviation, agricultural cooperation, and industrial development.”

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International coverage of the high-profile event depicts such rhetoric as a sign of China “allaying fear” of the BRI or “rehabilitating” the initiative’s image. Indeed, President Xi’s keynote speech at the forum indicates that China is responsive to external views of the initiative and its policies in general. In fact, the second half of his speech was widely read as sending messages to the West on key trade-related issues. In that sense, the shift can be regarded as an operational system upgrade responding to customer demand. But rather than a major upgrade as Lagarde’s 2.0 metaphor suggests, the changes made are far from a complete overhaul or reinvention.

For one thing, contrary to what leading BRI pundits and think tank experts have been advocating, there is still no sign that China is going to develop an actual “operating system” (permanent institutional structure with explicit mandates/rules) for the trillion-dollar initiative. Those advocates argue that the “under-institutionalized” BRI will be too easily hijacked by narrow economic interests of players involved. And the only thing close to an institutional upgrade coming out of the Forum is a set of recommendations made by the international advisory board to the Belt and Road Forum, which suggests China to consider turning the liaison office of the Forum into a full-blown secretariat for the BRI, or following the examples of G20, OECD or the Financial Stability Board to set up inter-sessional mechanisms to ensure coordination and continuation during intervals of the biannual Forum.

Absent of a major shift of the BRI’s modus operanti, the dozens of initiatives announced at this year’s Forum are more like patches to fix “bugs”. Below are some of those patches.

Framework for debt sustainability

Among the outcomes of this year’s Forum, the Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative published by China’s Ministry of Finance is probably the most obvious attempt to fend off criticism of the BRI, in particular accusations of it pushing excessive debt burdens onto other developing countries.

The new analysis framework was developed based on the IMF and World Bank’s Debt Sustainability Framework for Low-income Countries (LIC-DSF). It rates a country as low, moderate, or high in terms of its risks of being in debt distress, taking into account its debt coverage, macroeconomic projections, debt carrying capacity, among other factors.

Despite being modelled on the IMF-World Bank framework, the MoF tool applies some customization to the methodology that carries a distinct “BRI signature”. For example, when it comes to the relationship between public investment, economic growth and debt, the MoF framework is distinctively bullish about the potential for productive public investment to drive up economic growth in the long run, “while increasing debt ratios in the short run.” In comparison, the IMF, in a 2017 Guidance Note about the LIC-DSF, sounded more cautious on that same topic:

“Proponents of scaling up public investment maintain that productive investment, while increasing debt ratios in the short run, can generate higher growth, revenue, and exports, leading to lower debt ratios over time. At the same time, high economic returns of individual projects do not always translate into high macroeconomic returns. DSF users should therefore carefully assess the impact of a scaling-up of public investment.”

The view that large-scale debt-driven infrastructure investment is “worth the buck” is at the center of a Chinese developmental model that is being promoted through the BRI. And it is not without its value as Bretton Woods institutions like IMF and World Bank moved away from large-scale infrastructure building, leaving a gap in the developing world. And China’s engagement with established multilateral financial institutions is in fact less antagonistic than conflict-filled news reports tend to depict. In April 2018, the People’s Bank of China launched a capacity building center in collaboration with the IMF, providing training for leaders and officials from countries involved in the BRI. One of the training courses the Center offers is on managing debt sustainability. According to the People’s Bank’s website, countries responded very positively to the course, in particular those that are already using the LIC-DSF: Bangladesh, Cambodia, Ghana, Ethiopia, Djibouti, Tajikistan, Uzbekistan, Myanmar and Vanuatu.

But like other patches that are offered at the Forum, the MoF’s framework is a voluntary tool. It is not clear how the analysis can be integrated into lending decisions in the future, except for the possibility that a Multilateral Cooperation Center for Development Finance might adopt it.

Environmental governance of the BRI

Another area where the Forum is clearly responding to external pressure is how it handles the BRI’s massive environmental footprint. “Green” elements were given very little attention two years ago at the first BRI Forum. But the situation is noticeably different this time, as “green” elements were reflected in both the leaders’ speeches and the final ‘list of deliverables’. While criticism of China “lacking real will to address the challenge of climate change as it relates to the Belt and Road” still abounds, climate factors are being incorporated into initiatives announced at the Forum, albeit (again) on voluntary basis.

The “Green” updates rolled out this time include the formal launch of the International Coalition for Green Development on the Belt and Road and the signing of the Green Investment Principles.

The controversial Coalition, first conceived by the Chinese Ministry of Ecology and Environment in collaboration with the UN Environment, was one of the green highlights this year. Consisting of 26 countries, 8 international organizations, 65 non-governmental organizations and academic institutions, and 30 businesses (as of Apr 2019), the Coalition is an “open, inclusive and voluntary international network” to ensure that the Belt and Road brings “long-term green and sustainable development” to all concerned countries, according to the UN Environment’s description.

China’s environmental policy for the Belt and Road has been criticized for being vague and rhetorical. The formal launch of the Coalition at least provides some articulation on what aspects of “green” is China considering for the BRI. According to a Terms of Reference (ToR) circulated to participants of the Forum, the Coalition’s main mission consists of the creation of 3 platforms: a platform for policy dialogue, a platform for environmental information, and a platform for green technology transfer. The activities (divided into core and thematic) are mainly facilitative in nature: policy dialogue workshops, sharing best practices, publishing regular “BRI green development reports”. The structure of the Coalition, with its 10 thematic partnerships, opens a channel for external stakeholders to influence the environmental governance of the BRI on issues from climate change to biodiversity. After all, China’s Minister of Ecology and Environment is its co-chair. But actual mechanism for it to give policy inputs or affect project decisions is unclear. As one participant puts it: “All the measures will probably lead to more green projects, but not necessarily less bad projects.”

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Structure of the International Coalition for Green Development on the Belt and Road, from the Coalition’s Terms of Reference

The Green Investment Principles, co-developed by the China Green Finance Committee and the City of London, and signed at the Forum, follow the same facilitative style. According to a People.cn report, the initiators of the Principles will establish a secretariat that offers services for the signatories, which has the China Development Bank, China Exim Bank and Silk Road Fund among them. The services include a database for green projects under the BRI, a carbon emission calculator for development and investment projects, and a knowledge sharing platform.

Project portfolio

One of the most direct tests of all the upgrades and safeguards would be an examination of the actual portfolio of projects that China is supporting in the countries involved. The 2nd Belt and Road Forum provides a glimpse of where BRI is heading in this regard, even though it is understandably too soon for all the initiatives announced at the Forum to translate into tangible influence on project decisions.

Wang Yan from Greenpeace’s China office created a nice list of project deals signed during the Forum. Not surprisingly the list tilts heavily towards conventional infrastructure, comprised of mostly energy projects (concentrated in coal and hydro), railway and urban complex development. It is worth pointing out, though, that within the full list of outcomes, items do show renewable energy projects in the pipeline (e.g. a trilateral cooperation agreement signed among China, Ethiopia and Sri Lanka on renewable energy development).

The thing with infrastructure is that their long shelf life means projects built today will have long lasting effect for decades to come. Well-intentioned policy initiatives and safeguards are only useful if they kick in as early as possible in a project’s lifecycle. Five years and hundreds of projects into the BRI, we are getting a major update from the App provider that will likely only fix bugs of future features if components of the update get activated in a timely fashion.