China’s Big Infrastructure Project Trumps U.S. Ambitions

Donald Trump kicked off the administration’s so-called “Infrastructure Week” yesterday by announcing a plan to privatize America’s air-traffic control systems.

And while most American businesses will be watching for more clues over the coming days about how the president will enact his proposed $1 trillion infrastructure plan, there’s a potentially bigger opportunity in the works.

Back in 2013, Chinese president Xi Jinping unveiled an ambitious plan to re-connect the old silk road between China, Central Europe and Asia. The mammoth endeavor, called the Belt and Road project, will involve the construction of new roads, railways, airports and maritime routes crossing more than 65 countries covering 63% of the world’s population and 29% of global GDP.

The effort isn’t just about infrastructure: it’s a grand plan to show that China has well and truly entered the world stage and can play a leading role in promoting trade and culture.

“The next billion middle-class consumers are going to come from Asia, Latin America, Africa, the Middle East and Europe. So initiatives like the Belt and Road are really important for our company and our clients.”

Xi last month announced a $123 billion Chinese investment in the initiative, though it’s full cost isn’t yet clear. In a note to clients, HSBC said the Asia Development Bank had already pledged more than $1 trillion, amid an estimate that the Asian region alone will need around $1.7 trillion a year of infrastructure funding up until 2030.

“Companies of all types and sizes both inside and out of China in the infrastructure, telecommunications, trade, sustainability and financing sectors will benefit—including manufacturers, raw goods suppliers and logistics providers, as well as financial and professional services firms and more,” the British bank said.

Any CEOs thinking of diving in, however, should consider the sometimes unique geopolitical funding and operational risks.

How to assess the risks, and make a good bid
Great care should be taken: projects could span various territories, exposing companies to a patchwork of regulatory regimes, while some local partners might not always follow through on their funding commitments.

Levels of expertise among partners and local labor could vary wildly, increasing the need to mitigate potential delays, cost overruns and accidents.

PwC recommends companies assess whether projects are commercially viable by zeroing in on market supply and demand forces and checking how reliant they are on government and other incentives.

In a report on the opportunity released yesterday, it also urges executives to avoid putting too many eggs in too few baskets to spread their risk.

And just like families looking for a new home, companies should assess whether there’s plans for enough connecting infrastructure nearby.

To win bids, the consultancy’s report makes four recommendations:

1. Have a contingency strategy. Governments tendering for projects of national significance will be comforted if bidders have planned for disruptions in advance, including potential contractual disputes.

2. Align with local governments. Building strong relationships with local authorities is crucial as they seek input developing nascent regulatory systems.

3. Choose partners carefully. Companies that have worked with local governments in the past will know the ropes.

4. Share the risk. Taking on some, but not too much, of the burden will establish trust among shareholders. It could involve carrying equipment costs or drawing up a revenue-sharing plan.

Of course, even companies that don’t directly participate should watch the giant project’s progress. WPP CEO Sir Martin Sorrell, for instance, suggests it’s an important growth driver for companies everywhere.

“The next billion middle-class consumers are not going to come from the United States or Western Europe,” he told China’s Xinhau news agency.

“They’re going to come from Asia, from Latin America, from Africa, the Middle East and from South, Central and Eastern Europe. So initiatives like the Belt and Road are really important for our company and our clients.”