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One Belt One Road: PPP Alchemy – is the Silk Road paved in Gold? 2 dentons.com Contents

OBOR and PPP Projects 4 What is OBOR? – an overview 5 What are the objectives of OBOR? 6 Current Investment in OBOR 9 Types and locations of OBOR projects so far 9 OBOR and the PPP Model 11 Types of PPP 12

Key Challenges for OBOR 14 China’s true agenda 15 Funding 15 Political 16 Legal 17 Competition or cooperation 17 Resourcing and quality 18 Security 18

OBOR Case Studies 19 Karot Hydropower Project – Pakistan 20 Almaty Ring Road Project (BAKAD) – Kazakhstan 21

Conclusion – is the Silk Road paved in gold? 22

Biographies 24 Neil Cuthbert 25 Atif Choudhary 26

dentons.com 3 OBOR and PPP Projects

4 dentons.com What is OBOR? – an overview South East Asia, Russia, the Persian between. It will encompass in excess The “One Belt One Road” project Gulf, the Middle East, North Africa, the of 65% of the world’s population and (OBOR) is one of China’s key initiatives Mediterranean and in between. This include over 65 countries, which as part of its plan to assert its position as has been dubbed the New Silk Road have a combined GDP of over US$20 one of the world’s strongest economic Economic Belt (Silk Road). The second trillion and growing. The primary powers. OBOR was initially launched comprises a maritime route which purpose of OBOR is to create a by China’s President Xi Jinping in late runs southbound down the east coast gateway for China’s burgeoning 2013 as one of the Asian superpower’s of China, through the South China capital and other resources in a ambitious plans to accelerate outbound Sea and into the South Pacific before manner and on a scale not seen investment and to consolidate its heading westbound through the Indian before. Once the wheels of OBOR position generally across the globe. Ocean and Mediterranean Sea to are fully set in motion it will lay a Physically, OBOR is best understood Europe (Maritime Silk Road). platform for economic investments with reference to its two key tangible in almost every sector, but with an cornerstones. The first is an overland OBOR is China’s ambitious economic inclination towards infrastructure route from China through to Western road map which seeks to link Asia and trade. However, while it is easy to Europe, sweeping through South and and Europe and most quarters in consider OBOR as a project focused

dentons.com 5 on tangible outcomes in the form entered into a letter of intent with the corridors, whether it be roads, rail, of roads, railways, airports, ports, oil United Nations Economic and Social pipelines, airports, ports and more pipelines, power plants and the like, Commission for Asia and the Pacific which will not only link China with it is just as important to recognise (UNESCAP). For the United Nations to other OBOR nations but also OBOR that it is in fact modelled on a much throw its support behind OBOR in this nations themselves. wider premise. It is intended that manner goes some way to showing just OBOR, once fully fledged, will create how powerful this strategy is. The Silk Road and Maritime Silk everything from cooperation and Road can be broken down into six collaboration between members in Some commentators, mostly in the specific “economic corridors” which sectors of technology sharing and west, have likened OBOR to the have been identified by China, being flow of financial capital to wider Marshall Aid programme introduced the New Eurasian Land Bridge, the economic, political and social co- by the US after the Second World China-Pakistan Corridor, the China- operation between its members. War to energise and relaunch the Central Asia-West Asia Corridor, the economies of Europe battered by Bangladesh-China-India-Myanmar Following the launch of OBOR, many the devastating impact of six years of Corridor, the China-Mongolia- nations along its path have rushed war. There are similarities with some Russia Corridor and the China- to enter into bilateral treaties and of the overall goals of OBOR and the Indochina Peninsula Corridor. These agreements with China. To date, Marshall Aid programme, but there corridors identify sectors of special China has entered into well over are many structural, economic and importance along the route; however, 30 such agreements and trade political differences that make such a the reach of OBOR has no defined negotiators are working on overdrive comparison somewhat superficial. footprint per se and no country (or to increase this number. In some body of ocean) should be considered cases these agreements have already What are the objectives of as being outside its potential scope. gone through rounds of extension OBOR? and expansion, such has been the Although the true extent and detail of However, it is not only physical early success for all involved. It should the objectives of OBOR can only be connectivity which the Chinese are be noted that we are talking here of known within the corridors of power in concerned with. OBOR seeks also significant deals with countries such Beijing, the following are some of the to connect people along the route as Russia, Turkey, India and Pakistan, key objectives which are apparent in a through cultural understanding, which goes some way to showing just programme of this scale: financial integration, social integration how seriously OBOR is being taken and interaction, educational ties and among some of the regions and the Connectivity other intangible connections. world’s economic heavyweights. OBOR seeks to map out and construct more developed and efficient physical Export markets In a show of its intention that OBOR routes to support China’s unparalleled OBOR will assist Chinese enterprise will not just be a series of bilateral deals export market. The same routes would in tapping new markets and throughout the wider Eurasian region, be used to facilitate imports from strengthening China’s position in but something much more far reaching the same trading partners. What is existing markets. Many, but by no and global, earlier this year China envisaged is all manner of transport means all, of the OBOR member

6 dentons.com nations are underdeveloped Over capacity the provision of vital infrastructure nations with huge demand for new OBOR will provide an outlet for the investment, the scale of which no infrastructure and materials which release of China’s vast amounts of other country currently has the same China is uniquely well placed to economic capital and production appetite for as China. Beijing has made provide. China would be primed to capacity which have built up both it clear to all and sundry that OBOR provide an “end-to-end” solution domestically and overseas. China is intended to facilitate collaboration in that it can put up the required is the world’s largest producer of and cooperation between China finance (through debt and/or equity), many sought after commodities, and its neighbours (and beyond). A construction expertise, provision including cement and steel. However, natural outcome of this is that China’s of raw materials and goods and at the present moment there is not geopolitical power along the route will operational services. enough worldwide demand for the consolidate and strengthen. level of supply which China is able to While China has traditionally been provide. The launch of OBOR-driven By also providing the majority of strong in Asia, the Middle East and projects should see levels of utility the required financing for such Africa, it has not been able to force increase in order to close that gap investment China is encouraging its way as deep into the European and see China’s export markets begin and stimulating growth along OBOR market as it would like. Through to live up to their true potential. that otherwise might take decades OBOR, China will eventually be able to realise. As with the Marshall to present itself as a viable partner in Political Aid programme in Europe, the European markets, which is the next All states which sign up to OBOR beneficiaries of the aid programme frontier for them in many respects. undoubtedly have something to gain became inextricably “connected” to out of the strategy. For most, it will be the US and nowhere was this more

dentons.com 7 apparent than the collaboration on which make up the Special Drawing coming years and decades, there historical projects such as the General Rights (SDRs). This takes the RMB is a clear opportunity for financial Agreement on Tariffs and Trade into the elite class of currencies of markets both domestically in China (GATT), the International Monetary which the only other members are and abroad to develop and flourish Fund (IMF) and NATO. It will be the US Dollar, the Euro, the Japanese in sectors of the financial world interesting to see if there is a similar Yen and the Great British Pound. where China has so far been a less alliance of interests flowing from significant participant. A prime OBOR and how this manifests itself. In addition, China has entered into over example is that of Islamic finance 30 bilateral swap agreements with debt and equity capital markets in the Chinese growth jurisdictions all over the world, including Middle East. Today the finance sector One of the key objectives of OBOR a number of states on the OBOR route in the Middle East, led by the financial is that it should serve for the and significant players such as the gateway of Dubai, is experiencing general betterment of the Chinese EU, Great Britain, Russia, Switzerland growth in numbers which makes it population generally, particularly and Canada. Supplementing and a serious challenger to the likes of on the Western side of China complementing these agreements are London and Kuala Lumpur, certainly in which has long grappled with the some 20 offshore RMB clearing centres, the Islamic finance space. It is already influence of unruly neighbours, including in hubs such as New York, clear that there is a significant role lack of coastal access and lack of London, Hong Kong, Paris, Frankfurt and for Chinese financial institutions to investment generally. Western China Zurich. play here and Dubai’s International is an important part of OBOR’s plans Financial Centre has already attracted and OBOR will increase the quality So while this financial infrastructure interest with four of China’s largest of life whether it be through job is continually evolving in support of banks (Industrial and Commercial creation, education or other new RMB internationalisation generally, Bank of China, Agricultural Bank of opportunities. it is widely expected that OBOR will China, China Construction Bank and provide a further significant boost Bank of China) having established Internationalisation of the renminbi to Beijing’s efforts to increase the there. OBOR will ensure that such Development of China’s financial sector RMB’s influence across the financial financial footprints in new markets will both at home and abroad will be an world. With the sheer scale of only get larger. important by-product of OBOR. In numbers being thrown around in the particular, OBOR will provide a platform context of OBOR-related investment, To date a number of Chinese banks for the further internationalisation of the it is expected that both outflows have listed conventional bonds on renminbi (RMB), a strategy which China and inflows of RMB capital will be Dubai’s NASDAQ and it is touted has been actively pursuing over the last significantly boosted, which will have that it is only a matter of time before decade. a very positive impact for Chinese this evolves to their listing of Islamic importers and exporters. bonds (known as sukuk) and other Significant ground has already been Islamic finance instruments. OBOR made on this front. As recently as Financial markets and Islamic finance projects are already starting to see October 2015, the IMF added the In light of the level of spending direct benefits of Islamic finance with RMB to the basket of currencies foreseen by OBOR projects in the the financing package of the 660MW

8 dentons.com coal-fired power plant in Tharparkar, Although not formally tied to OBOR, Although the establishment of Pakistan including Islamic finance the establishment of the Asian the AIIB was met with a degree of tranches of funding in its structure. Infrastructure Investment Bank (AIIB), hesitance and some suspicion from with headquarters in Beijing, can the likes of Japan and the US, it has Current Investment in OBOR naturally be seen as an institution which already shown that it is willing to be Although OBOR has been met with will back OBOR with some strength. collaborative and cooperative with pessimism in certain quarters, the The AIIB was established with the other institutions of similar stature government has already taken steps backing of 57 prospective founding and standing. The M4 road project in to show just how seriously OBOR is members, although this number is set Pakistan, for example, is being jointly being taken as one of its centrepiece to rise with other states who do not financed with the ADB in what can initiatives. In pursuit of OBOR objectives, hold such status showing an interest only be a positive sign for relations a new US$40 billion fund (the Silk Road in becoming members. These states between the institutions. Fund) has been established and is include influential powers such as Great earmarked to receive a further boost Britain, France, Italy and Germany. Outside the headline-grabbing figures to US$100 billion. With the backing With initial capitalisation to the tune being bandied about when discussing of the likes of the China Investment of US$100 billion and room to grow the larger funds such as the Silk Corporation, Export-Import Bank of significantly, the AIIB is already being Road Fund and the AIIB, numerous China and China Development Bank, spoken of in the same breath as the small funds are being established it is easy to see that the Silk Road Fund Asian Development Bank (ADB) and the by individual institutions, the sum of means serious business. World Bank. which will have a serious impact. Earlier this year the Industrial and Commercial The ink has barely dried on the After formally opening in early 2016, Bank of China launched a GBP 10 establishment of the Silk Road Fund, the AIIB has not wasted any time in billion fund to facilitate infrastructure yet it has already kicked into gear announcing projects it is willing to projects in Central and Eastern Europe. with its first investment being in the fund. The first raft of projects were multi-billion dollar Karot hydropower finalised in the middle of 2016 and Types and locations of OBOR project in Pakistan in early 2015 the geographical spread of these, projects so far (discussed further below). Later that and the diversity of the sectors in OBOR does not have an explicitly same year the Silk Road Fund entered which these projects are located, stated mandate in terms of the types into a formal agreement by way of go some way to showing how broad of projects it will provide and support. a Memorandum of Understanding the mandate of the AIIB will be. However, it is inevitable that it will with Russia’s Vnesheconombank These initial projects include road strongly back all sectors in the wider and the Russian Direct Investment projects in Pakistan and Tajikistan, an infrastructure space, with a focus Fund for the construction of energy electricity project in Bangladesh and on the transport sector i.e., roads, infrastructure projects. Subsequently a housing scheme in Indonesia. It is rail, ports, airports and pipelines. As it has also taken a stake in Novatek no coincidence that there is a distinct geographical connectivity is one Inc’s Yamal LNG project in Russia and alignment between these projects of the key objectives of OBOR, it is made an investment in Italian tyre (particularly the roads in Pakistan and natural that the transport sector will producer, Pirelli. Tajikistan) and the OBOR philosophy. be a major beneficiary. However, this

dentons.com 9 is not to say that other sectors will advertisement of what OBOR has to a power purchase agreement entered miss out. In taking into consideration offer its member nations. By way of into with one of Pakistan’s national the various objectives of OBOR example, the pioneer project for the utilities providers. At the conclusion of as referred to earlier in this article, Silk Road Fund is the 720MW Karot the concession period the asset will one can foresee that the energy, hydropower project which is currently be transferred to the government of petrochemicals, education and under construction on the Jhelum river Pakistan. healthcare sectors will all benefit, in Pakistan. The project forms part of whether directly or indirectly. the China-Pakistan Economic Corridor CPEC generally is one of the initial (CPEC) and is a significant investment offshoots of OBOR. It is a series of Out of an increasingly large bloc of with US$2 billion currently allocated projects flagged between the Chinese nations showing a very keen interest, by the Silk Road Fund to finance its and Pakistani governments, with the Pakistan has been a major beneficiary completion. The project has been overarching goal being to link China’s of OBOR in its early years. This is a nod structured under the BOOT model with Xinjiang region with the strategically to the strong and enduring relationship a construction period of five years to located Gwadar deep sea port on the two counties have and, by some be followed by a 30-year concession the southern tip of Pakistan (which is measure, Pakistan is becoming an period which is underwritten by way of already under operation by Chinese

Source: Mercator Institute for China Studies (https://www.merics.org)

10 dentons.com interests). Over US$45 billion has Sindh, the M4 highway project, which Infrastructure gaps already between committed by the will connect Faisalabad and Multan Many of the nations along the Silk Chinese to kick start CPEC which (two key manufacturing hubs), the Route are underdeveloped nations will eventually connect the two Chashma nuclear power project in with a need for foreign investment, countries with over 3,000 kilometres Mianwali and the Karot hydropower with a particular emphasis on of highways, railways, pipelines, project on the Jhelum river. infrastructure, particularly through fibre-optic cabling and other the Asia/South Asia segments of connections. Such is the size of this Further afield, in February 2016 the the route. With growing populations initial investment in CPEC that some first train carriages from China began and failing infrastructure, many figures put it within the region of 20% arriving in Iran, having travelled of these nations are crying out of Pakistan’s overall GDP. across new segments of rail lines for partnerships with those who running through Kazakhstan and currently have the appetite for CPEC presents a world of opportunity Turkmenistan. The China-Thailand financial investment on a similar for both nations with potentially game- railway project appears to be back scale to China. This can be coupled changing benefits on offer. Upon on track following a false start earlier with the arduous position in which completion of CPEC, the distance in 2016 and other landmark rail many of the oil-based economies which most of China’s oil imports projects under consideration are the find themselves, with the stagnation currently travel (through the Strait of China-Uzbekistan-Kyrgyzstan rail of international oil prices, particularly Malacca) could be reduced by around project and high-speed rail line from in the Arabian Gulf and wider Middle 70%. In the other direction it will act as Kunming to Singapore. East region. The outcome of these a gateway for Chinese exports going factors is that many of the projects through to Asia, the Middle East, Africa, OBOR and the PPP model in such nations which are looking Europe and beyond. With many OBOR projects being to fill their infrastructure gaps are regularly launched, issues and looking for equity investments On the flipside, CPEC is seen as questions will arise as to how best of the kind which the PPP model an unprecedented opportunity for to structure them. Some of the strongly supports and which the Pakistan. Pakistan is the world’s eighth more difficult large-scale projects OBOR strategy will encourage. This largest state with a population nearing will be funded through government- is of course a move away from the 200 million, and CPEC will provide to-government grants, others will traditional procurement methods much need infrastructure in the utilise the traditional export credit which used to see the engagement form of utilities and transport assets models, such as buyer credits and of Chinese enterprise solely for their which should see job growth boosted supplier credits, and, some will use construction capabilities. significantly and a positive impact on the increasingly popular “EPC+F” its own export markets, which are a structure (engineering, procurement Investment through equity interests key economic driver of their own. and construction plus financing). The Chinese government itself is However, many will utilise the Public now aggressively advocating and Other projects already earmarked, Private Partnership model (PPP) encouraging outbound investment in under construction or completed for structural, economic and legal the form of equity stakes in projects include the Tharparkar coal project in reasons, including the following: and assets across the globe. We

dentons.com 11 have already mentioned some of seeing that PPP laws and regulations is that in the longer term through these diverse investments in places are being implemented and developed constructive collaboration, these risks such as Russia and Italy above. A in order to support and facilitate the can be reduced across the board for further prime example of this is in the PPP model. In some cases the legal both partners. agriculture sector. Where previously impediments are being broken down China would rely on importing food in a way which will support the use Project financing products at market prices to feed its of the PPP structure. This will, in turn, Significant development of late large population, it is fast learning support OBOR growth. in the project financing arena that it makes far more strategic means that governments, financial sense to simply acquire agriculture Joint ventures institutions and the private sector assets in foreign lands and operate PPPs are one of the more convenient are becoming more and more them themselves. By doing so it is and workable project models for comfortable with project financing effectively annexing the farm land contractors who are looking to get PPPs. Although numerous PPPs of other countries as part of its own into joint ventures with foreign entities. have suffered wobbles in the early agriculture sector (which suffers as Increasingly in recent times, Chinese days where participants failed to a result of a very small proportion of enterprises are looking to commit to plan and understand the structure mainland China being productive countries beyond just contracting adequately, this model is slowly agricultural land). The OBOR strategy work. They are now looking to invest but surely being refined and made and PPP model complement each with, and in, the nations which are more robust to the point where other considerably in this respect. looking to them for their expertise. By PPPs are now regularly achieving a becoming a partner to governments, successful financial close, including Legal impediments rather than mere employees, there is many involving Chinese interests. In many of the nations along the scope for significant mutual benefits Chinese companies are becoming Silk Route the mandatory position to arise. Governments are seeking increasingly comfortable with this for one reason or another is for the investors who are willing to commit to model, helped in a small part by host nation to have ownership (or their countries for longer terms, and the explosion of PPP projects within at least strict control) over its own Chinese enterprises are looking to China over the last 24 months. infrastructure. Without the resources become part of the decision-making to go it alone, the PPP model is an process rather than being hindered The further development and obvious choice for them to meet their by it as they historically have been in refinement of project financing infrastructure needs without ceding some countries. PPPs strongly support techniques will be an important rights they wish to retain. By awarding these objectives. Although it must be factor in the successful a concession they can attract foreign recognised that there is a possibility that implementation of OBOR projects. know-how and investment while doing business in partnership with host maintaining ownership (or the right to governments can increase risk-sharing Types of PPP ownership at a later time). on the part of the private sector (for Given the importance of the PPP example, in the case of political risk structure in the OBOR context, and In certain regions (for example, parts of which would otherwise exclusively lie the expected uptake of the PPP model the Middle East and Africa) we are now with the host government), the goal in facilitating OBOR projects, it is

12 dentons.com worthwhile to touch on what exactly sector there are incentives towards private party does not automatically is meant by the term “public-private efficiency in terms of both time and have to transfer the asset to the partnership”. It does not have a fixed cost. They can also have certainty government. Likewise the obligations legal meaning per se, nor is there one around revenue streams with a of the government will usually cease clearly defined framework for a project single offtaker/customer in the at the conclusion of the concession to be deemed to fit within the PPP form of the relevant government. period. At this point the private party model. The general premise is that On the downside, the private cost can assess the relevant options at the it is a term used to describe a wide of financing a BOT is often seen time, which includes extending the variety of arrangements involving the as an impediment vis-à-vis the contract in place, negotiating a new collaboration and cooperation between publicly funded models which can contract, selling the asset or ceasing the public and private sectors. There be cheaper on the back of the operation altogether where the is no single or “standard” form of PPP availability of cheap public finance. asset is no longer able to produce project or structure. A PPP project a meaningful output. As a general can essentially take whatever form BTO rule BOOs are more common where the parties desire in order to meet the Conceptually the key difference the project is deemed to be a higher objectives of the project in question. between a BTO and BOT project is that risk project and/or where significant Below we describe some of the the relevant asset is transferred to the future investment is likely. common variations of the PPP model government from the time construction which have evolved over the years and is completed. Following transfer of the ROT (rehabilitate-operate-transfer) of the use of the broader PPP structure. asset the private party still maintains This is similar to the BTO rights to operate the asset for a fixed arrangement; however, it involves BOT (build-operate-transfer) period of time in order to recover its the rehabilitation or upgrade of Under a BOT mandate the contractor investment and make a profit. The an existing facility rather than will take the asset right from the BTO model is often employed over the the construction of a new facility. construction phase through a BOT model where there are legal or Following rehabilitation or upgrade, fixed operating life, typically for a regulatory impediments to the private the concessionaire operates the period of 20-25 years, following party owning the assets over a long facility in the same way as a BOT and which the asset is transferred to period of time. then transfers it back to government the host government. BOTs tend at the end of the agreed period. to be favoured by governments as BOO design, construction and operating The BOO structure is similar to BOT risk are all transferred to the private and BTO; however, at the end of sector. Similarly, for the private the relevant concession period the

dentons.com 13 Key Challenges for OBOR

14 dentons.com China’s true agenda? In trying to determine the true institutions with the likes of the Asian A key challenge already being faced agenda, it must be remembered Development Bank, the International by China is doubts over what the that OBOR encompasses hybrid and Finance Corporation, the World Bank true motivations are behind its OBOR complex ideas which combine both and others. vision. Although OBOR has been philosophical and economic elements. able to garner support from global Notwithstanding this complexity, So it is ultimately important to heavyweights such as Russia and however, the overarching intention remember that OBOR is so much more India, there has been no shortage appears to be that through the than being about just infrastructure of questions around what its real execution of OBOR, the world will be and economics. It also encompasses objectives are. The reality is that OBOR positively guided to think in a different China’s future role in the world, is of a scale unlike anything seen in way which will be mutually beneficial promoting its ideas and philosophies recent generations when it comes to to all. The geopolitical narrative which and demonstrating how China international or regional development plays out will promote a more inclusive can cooperate with the rest of the programmes. Further, it is being governance regime where developed world and build mutually beneficial spearheaded by China, one of a small and developing countries alike are partnerships with other countries. cluster of geopolitically significant encouraged to work together with nations which is constantly competing greater equality and prosperity. As such, Funding with others in the global power stakes. China is sending out a clear message A strategy such as OBOR is almost A consequence of this is that OBOR is that OBOR will help developing impossible to quantify from a and will continue to be the subject of countries benefit in a way that existing financial perspective. As it continues much speculation. global political and economic order to be rolled out over the coming currently does not. In the words of years, its true extent will evolve, as However, the Chinese government Foreign Minister Wang Yi “the initiative is will an understanding as to the scale has been very clear on what their China’s idea, but the opportunities it has of resources (financial and other) broad agenda is. created belong to the world”. which are required to be allocated to it. However, it does appear clear “The orderly and free flow of economic It is important to note that this vision that when OBOR is considered in its factors, highly efficient allocation of not only applies to how China seeks totality, we must cease discussions resources and deep integration of to deal with other governments, but about billions or even hundreds of markets; encouraging the countries how it sees the entire OBOR “system” billions of dollars – OBOR is well and along the Belt and Road to achieve integrating and interfacing with truly in the elite “trillions” category economic policy coordination and international organisations and the when it comes to cost and impact. As carry out broader and more in-depth international community at large. As such a central question surrounding regional cooperation of higher such, China is and will be seeking OBOR is how can China afford it? standards; and jointly creating an to work within existing international The short answer is that it cannot do open, inclusive and balanced regional systems and not outside them or it alone. Although strides have been economic cooperation architecture adverse to them. A good example is made through the establishment that benefits all.” – China State that they envisage and encourage of the Silk Road Fund, the AIIB, the Council, March 2015 cooperation of their own financial New Development Bank and other

dentons.com 15 similar financial initiatives, the reality to doing business with certain of relationship between the two can be is that the amounts contributed so these countries. That being said, among the most complementary of far fall well short of what is and will the Chinese do have a track record any two nations when considered in be required in the coming years. And of taking their enterprise to places the OBOR context. all this is at a time when things are others may be more reluctant to in becoming fiscally more challenging terms of risk appetite. Changing of the political guard is for China, whether it be through also a major risk factor facing OBOR, the flight of capital offshore, record By way of example, the current vision particularly in the infrastructure consumer debt levels or a marked for CPEC sees its run through the projects space where contracts slowdown in economic growth when region of Kashmir which has been can be awarded for decades at a compared to recent years. disputed between Pakistan and time, and the periodical changing of India since partition in 1947. Tensions administrations presents challenges In addition to the funding challenges between the neighbours over this which should not be underestimated. which any project of the scale of OBOR issue have been frosty ever since A very recent example of this and would have, there are certain specific and military action has the potential its impact on Chinese businesses challenges that OBOR will face. to flare up at any time. So while was seen in Sri Lanka when the For example, how does one attract CPEC forges through the Pakistan- government of Mahinda Rajapaksa investment to high-risk countries such controlled side of Kashmir, there are was replaced in early 2015 with as Pakistan, Afghanistan and Syria? The no guarantees that India will stand by the administration of Maithripala status quo in countries such as these is and let it run its course. Sirisena. One of the first acts of the already an issue of much concern. Will new administration was to suspend investors be willing to take the plunge In India generally, the rollout of OBOR various projects implemented by on projects which will span possibly has been watched with a degree the Rajapaksa regime, including decades of uncertainty? Will Western of caution. From some quarters the Colombo Port City project. The financial institutions, shackled as they the view appears to be that getting Mattala Rajapaksa International are by European Union (EU) and US onboard with OBOR can only offer Airport in Hambantota has not fared regulations, collaborate with Chinese India marginal benefits and that it much better under the new regime institutions to help finance OBOR? may be better served trying to forge which refuses to pump more capital its own path, given its own size and into the failed project and in fact is Political economic might. However, the reality now asking the Chinese to enter into While many of the countries which is the two Asian heavyweights will a debt-for-equity swap arrangement, have embraced or at least shown need to forge a path together as the which has been firmly rejected. an interest in OBOR are strategically mutual benefits are obvious. China important to China, a number of has excess capacity and capital Beijing and Moscow have long them find themselves in a tenuous flows which are primed to be put to had a solid relationship with one position in the world from a political use, and India has a thirst for new another, strengthened in part by and geopolitical perspective. It awaits infrastructure which cannot be kept solidarity through their similar to be seen whether diplomacy can up with domestically. Arguably, adverse treatment by the West on allays fears currently held in relation if minds are able to meet, the certain fronts. At a time where the

16 dentons.com rouble is flailing and oil prices are to come up against from a legal Finance Corporation are some of the recovering from record lows, early perspective as it pursues OBOR better known such institutions. A key sentiment from Russia is that OBOR going forward. challenge for OBOR will be whether is being seen as complementary to it and China will be perceived as Moscow’s own Eurasian Economic Even in parts of the OBOR map competition or a threat to these well- Union vision rather than a threat to which have well-established legal established institutions. it. These and other factors should systems it is being envisaged that see the two nations form closer ties the Chinese could find themselves The early signs coming out of China in what is a critical segment of the in a minefield of legal and regulatory are positive and signal China’s intent belt for China, with Russia wielding problems. A perfect example of this that it will cooperate and collaborate significant influence throughout the challenge concerns those countries with its peers. As young as OBOR is, Commonwealth Independent States who look set to embrace OBOR China has already shown material and beyond. but which are members of the EU. progress in firming up its relationships Not only will the Chinese need to with some of these multilaterals. In May Legal understand the implications of their of this year the AIIB and ADB signed Inherent in the vastness of the own domestic regulations when a memorandum of understanding to OBOR project is the fact that it will dealing with EU nations, but they will set out their intention to work together include a large number of countries also need to properly understand for the purposes of financing projects which have underdeveloped, the implications of the applicable in Asia. The memorandum provides misunderstood, complex or politically EU laws and of course the laws of for the institutions to work together partial legal systems (and, in some the host nation. Clear and detailed at a strategic level in order to execute cases, all of the above!). This means advice in relation to the legal and what are, in many cases, common it is inevitable that large numbers regulatory environments where objectives and interests. As mentioned of OBOR projects will proceed on OBOR will take Chinese enterprise above, the M4 highway project in the premise of legal uncertainty will be of utmost importance. Pakistan is the first project which the and with a degree of scope for AIIB and ADB will be co-financing, with failure. This issue has already come Competition or cooperation? plans of many more to come. under the spotlight as OBOR sets OBOR and its affiliated institutions foot in Indonesia, where just days (such as the AIIB) are arguably The AIIB has also entered into a after Indonesian President Joko the latest entrants in a somewhat similar arrangement with the World Widodo broke ground on the US$5.5 crowded market of multilateral Bank. In April 2015 the two banks billion high-speed rail network development institutions. There entered into a framework agreement connecting Jakarta to Bandung, the are of course a myriad of other in relation to the co-financing of project was suspended because of international organisations/alliances projects throughout Asia. inconsistencies with the issuance of which have a similar mandate to that the required permits and licences. of the OBOR programme. The World So, while the best of intentions are Although the project is now back Bank, Asian Development Bank, being shown by players both old and on track, it demonstrated some of European Bank for Reconstruction new, results are what will ultimately the challenges China can expect and Development, and International matter to those watching.

dentons.com 17 Resourcing and quality rolled out at a pace whereby quality is and will continue to be one of the As ambitious as the OBOR vision is compromised? In the short term, key challenges which OBOR will face. is, it is inevitable that questions will at least, the answer should be in the Afghanistan, Iraq and Syria are all arise as to whether China does in negative. There is well-publicised countries which are on the OBOR fact have the capacity to deliver excess capacity in the Chinese road map and it goes without saying projects they have and will commit market at present and there will be a that, certainly at this point time, this to implementing, on time and to focus on ensuring this is used wisely. will present a myriad of issues for the the required standards of quality. However, the challenge will likely Chinese on the security front. We have discussed above that come to the fore as and when that financing of the required volume of capacity is used up and the supply/ projects will be a major challenge; demand matrix starts evening out. however, even if those challenges are overcome there will be questions Security as to whether OBOR is asking for It is only natural for a project which too much to be done too quickly. encompasses much of Asia, the Is there a risk that projects will be Middle East and Africa that security

18 dentons.com OBOR Case Studies

dentons.com 19 Karot Hydropower Project – • Approximately US$1.6 billion EPC • Subject to a 30-year PPA with Pakistan contract has been awarded to Pakistan’s Transmission and • 720MW hydroelectric power Yangtze Three Gorges Technology Dispatch Company. project on the Jhelum river in and Economy Development Rawalpindi, Pakistan. Co., which will largely handle • Debt and equity funded by the Silk engineering and construction Road Fund (one of the fund’s first • Following completion it is expected aspects, and China Machinery investments), International Finance to deliver power sufficient to run 7 Engineering Corporation, which Corporation and other Chinese million households. will largely handle procurement. financial institutions including the Export-Import Bank of China and • Is part of the “China-Pakistan Economic • Implemented as a build-own- China Development Bank. Corridor”, which is a flagship subsection operate-transfer (BOOT) project of the road and belt. with a 35-year concession • Implemented in accordance period. This includes a five-year with Pakistan’s Policy for Power • Developer is Karot Power Company, construction period which is due Generation Projects 2002 which in which China Three Gorges South to complete by 2020, followed by encourages entry into PPPs and Asia Investment Ltd (a subsidiary of an operation period of 30 years. offers support to foreign investors China’s state-owned China Three seeking to invest in Pakistan’s Gorges Corporation) is the majority power sector. shareholder.

20 dentons.com Almaty Ring Road Project (Turkey) / SK Engineering and respect of tolls and will not retain (BAKAD) – Kazakhstan Construction (Korea). tolls collected from users. • 66 km toll road which will bypass Almaty city with a population of • Part of Western China/Western • “If successful, the Almaty over 2 million citizens. Europe transnational highway. Ring Road PPP will serve as a blueprint for new public-private • The first PPP and priority project • Subject to a 25-year concession partnerships in Kazakhstan in the in the road sector for the GoK period. This includes a five-year transport infrastructure sector and is included on the “List of construction period, followed by and possibly in other sectors that Concession Projects of Special an operation period of 20 years. need to attract private funding. Importance”. This will be the first PPP structure • Concessionaire will receive of its type not only in Kazakhstan • First launched in 2012, preferred “Availability Payments” from GoK, but in the whole of Central Asia.” bidder was announced in 2016 which retains traffic risk, i.e. it will – EBRD Managing Director for as Alsim Alarko (Turkey) / Makyol only act as collection agent in Infrastructure, Thomas Maier

Source: http://www.karotpower.com/index.php?action=About Project

dentons.com 21 Conclusion – is the Silk Road paved in gold?

22 dentons.com Whichever way one looks at it, the it clear that they are not of that ilk. estimated at this point in time. Not OBOR initiative is arguably the This certainly bodes well for those only will these benefits be in favour of most globally far-reaching and along the belt and road and other China and its people, but also to those impactful economic strategy since stakeholders who are pinning high along the OBOR route who choose to the US Marshall Aid Programme, hopes on the success of this mega engage with China and its vision. The which was implemented after WWII. project. benefits will be economic, political, Many commentators have and will strategic, cultural and social. In the continue to share their theories Despite the best of intentions and case of some countries these benefits as to whether OBOR will be as efforts, it is without doubt that there are likely to be “game-changers” in successful as Beijing is hoping. As are numerous challenges which their own modern history. Crucial with anything of this nature, it will lie in OBOR’s path. Some of these infrastructure which otherwise ultimately be judged and its legacy which we have touched on can be might take decades to deliver is now will be formed based on the results considered somewhat obvious and seemingly in a position to be delivered it achieves. What can be said at inherent in a project of this scale. on an accelerated timetable and the this point, however, is that China Others will emerge and evolve, as consequential benefits this can bring will not be found wanting in terms OBOR itself emerges and evolves in about are endless. of the resources and planning it is the years and decades ahead. throwing behind OBOR. The tenure So yes, it is submitted that the Silk of President Xi will to some extent be What is clear, however, and has Road is potentially paved in gold, judged on the level of success OBOR been since OBOR was announced, both for China (for the reasons achieves and, where many might shy is that the potential benefits for all stated), and for those countries away from this kind of pressure, he involved are immense to the point of that embrace this initiative and the and his administration have made being immeasurable or accurately potential benefits that it brings.

dentons.com 23 Biographies

24 dentons.com Neil Cuthbert Senior Partner United Arab Emirates T +971 4 402 0900 [email protected]

Neil is a banking and finance the author of the Firm’s Standard Banking, Finance and Transactional partner focusing on project and Introduction to Project Finance and Law by Expert Guides (2015). He has infrastructure financings. He has is a past leader of its International also been recognised in: been based in Dubai since 2001. He Projects group. has extensive experience of advising • Euromoney’s Guide to the World’s banks, governments, borrowers, Neil was head of the Dubai office Leading Energy and Natural sponsors and others in project from 2001 to 2010. He was Managing Resource Lawyers financing transactions covering a Partner of the Firm’s Middle East offices wide range industries, including from 2005 to 2011 and is currently • Euromoney’s Guides to the the oil and gas, electricity, water, Senior Partner of the Firm’s Middle East World’s Leading Project Finance mining, leisure, transportation and offices. He is also a member of the Lawyers telecommunications industries. Policy and Planning Board of Dentons He also has a general banking UKMEA LLP and sits on the General • Chambers Global Guide to the practice that includes advising Advisory Committee of Dentons. He World’s Leading Lawyers banks, borrowers and others on a was also a member of the Global wide range of banking products, Board of Dentons from 2011 to 2015. • Chambers Global Guide to the including lending, structured World’s Leading Project Lawyers finance, derivatives, trade finance, Neil is recognised as one of the development finance and world’s leading practitioners in • The Guide to the World’s Leading restructurings. He has lectured Banking (2015), Project Finance Project Finance Lawyers extensively on a wide range of (2014) and Public Procurement (2014) banking subjects including at the as nominated by his industry peers, • Legal Experts – Guide to the Euromoney Winter and Summer Who’s Who Legal series. Neil is also World’s Leading Emerging Market Schools of Project Finance. He is recognised by peer nominations in Practitioners (Project Finance).

dentons.com 25 Atif Choudhary Associate United Arab Emirates T +971 4 402 0900 [email protected]

Atif Choudhary is an Associate in in project financing transactions Middle East North Africa region and Dentons’ Dubai office where he is a with a focus on the transportation internationally. He has advised in member of the Banking and Project industry. Recent experience includes relation to a wide range of banking and Finance group. Prior to joining Dentons working with clients (including Chinese finance matters, including syndicated in 2013, Atif worked at Minter Ellison sponsors) on infrastructure PPP projects lending, real estate finance, corporate Rudd Watts in Auckland, New Zealand. in Africa and Asia. finance, restructuring and other general banking and finance matters. He He has experience in advising He also has general banking and has experience in both conventional governments, sponsors and others finance experience, both within the finance and Islamic finance matters.

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CSBRAND-965-One Belt One Road Guide_final — 21/12/2016