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Isep & Bsg Report ISEP & BSG REPORT April 2020 BELT AND ROAD DECISION-MAKING IN CHINA AND RECIPIENT COUNTRIES: HOW AND TO WHAT EXTENT DOES SUSTAINABILITY MATTER? Thomas Hale, Chuyu Liu, Johannes Urpelainen 1 ACKNOWLEDGEMENTS We thank Jackynicole Eyocko, Anneliese Gegenheimer, Andrew Miner, and Jung Kian Ng for outstanding research assistance. We thank Blake Berger, Han Chen, Muyang Chen, Matthew Erie, Ilmi Granoff, Katharine Lu, Xinyue Ma, Tim Stumhofer, Jiang Xiheng, Dimitri de Boer, Andrew Strange, Yeling Tan, and Yan Wang for their comments on previous drafts. All remaining errors are ours. FUNDING We gratefully acknowledge the generous support from the ClimateWorks Foundation. AUTHORS Thomas Hale. Tom is Associate Professor of Global Public Policy at the Blavatnik School of Government (BSG), University of Oxford. Chuyu Liu. Chuyu is a postdoctoral fellow at the Initiative for Sustainable Energy Policy (ISEP). Johannes Urpelainen. Johannes is Prince Sultan bin Abdulaziz Professor of Energy, Resources and Environment at the Johns Hopkins School of Advanced International Studies. He is the Founding Director of ISEP. SUGGESTED CITATION Thomas Hale, Chuyu Liu, and Johannes Urpelainen. 2020. Belt and Road Decision-making in China and Recipient Countries: How and To What Extent Does Sustainability Matter? ISEP, BSG, and ClimateWorks Foundation. 2 TABLE OF CONTENTS EXECUTIVE SUMMARY .......................................................................................... 7 Key findings ............................................................................................................ 8 Recommendations .................................................................................................. 9 Increase capacity ................................................................................................. 9 Increase control ................................................................................................. 10 1. INTRODUCTION .................................................................................................. 12 Overview of current writing on Belt and Road ..................................................... 14 Conceptual framework: Reverse two-level games ............................................... 16 2. BRI DECISION-MAKING IN CHINA .............................................................. 18 What decision-making processes are relevant for different financing mechanisms? ......................................................................................................... 19 Who are the key actors and what are their interests? .......................................... 27 Political leadership ............................................................................................28 Bureaucratic Regulators .................................................................................... 29 Policy banks and insurance ...............................................................................38 State owned enterprises .................................................................................... 47 Provincial governments .................................................................................... 50 3. BRI DECISION-MAKING IN RECIPIENT COUNTRIES ............................ 57 Malaysia ................................................................................................................ 58 Economic and diplomatic relationship with China .......................................... 58 Key actors and their interests ........................................................................... 58 What decision-making processes, formal and informal, govern different aspects of BRI projects? .................................................................................... 59 3 How and to what extent do sustainability considerations influence decision-making? ............................................................................................. 60 Pakistan ................................................................................................................. 62 Economic and diplomatic relationship with China .......................................... 62 Key actors and their interests ........................................................................... 63 What decision-making processes, formal and informal, govern different aspects of BRI projects? .................................................................................... 65 How and to what extent do sustainability considerations influence decision-making? .............................................................................................. 66 Kazakhstan ........................................................................................................... 68 Economic and diplomatic relationship with China ......................................... 68 Key actors and their interests .......................................................................... 68 What decision-making processes, formal and informal, govern different aspects of BRI projects? .................................................................................... 70 How and to what extent do sustainability considerations influence decision-making? .............................................................................................. 70 Kenya ................................................................................................................... 72 Economic and diplomatic relationship with China .......................................... 72 Key actors and their interests ........................................................................... 72 What decision-making processes, formal and informal, govern different aspects of BRI projects? .................................................................................... 73 How and to what extent do sustainability considerations influence decision-making? .............................................................................................. 75 Indonesia ............................................................................................................... 76 Economic and diplomatic relationship with China .......................................... 76 Key actors and their interests ........................................................................... 76 What decision-making processes, formal and informal, govern different aspects of BRI projects? .................................................................................... 78 4 How and to what extent do sustainability considerations influence decision-making? .............................................................................................. 79 4. CONCLUSION: KEY FINDINGS AND RECOMMENDATIONS ............... 80 Key findings ......................................................................................................... 80 Recommendations ................................................................................................82 Increase capacity ...............................................................................................83 Increase coordination ....................................................................................... 85 Increase control ................................................................................................ 86 REFERENCES ........................................................................................................... 87 5 LIST OF FIGURES Figure 1: Relevant Actors and Interactions for a Typical Chinese Overseas Project ………………23 Figure 2: Typical Institutional Setting for Approval of Foreign Direct Investment by Central SOEs...............................................................................................................24 Figure 3: Chinese Central Government Regulatory Agencies for Belt and Road Projects……………………………..................................................................…………………………28 Figure 4: Structure of Environmental Institutional Framework (adapted from Pakistan EPA) .........................................................................................................................................................67 LIST OF TABLES Table 1: The BRI Project Life Cycle and Key Actors………………………………………………22 Table 2: Operational Procedure Requirements of ESS of CHEXIM and CDB ………………………44 Table 3: Key Actors and Their Interests and Functions in China……………………………………52 6 EXECUTIVE SUMMARY “Greening” China’s Belt and Road Initiative (BRI) is necessary to meet global climate and sustainability goals.1 Fortunately, there is increasing recognition in China and in BRI countries of the need to align BRI with global and national sustainable development targets. At the Second Belt and Road Forum in April 2019, President Xi Jinping declared that “We should pursue the new vision of green development and a way of life and work that is green, low-carbon, circular and sustainable.” A wide array of standards and principles have been developed and promulgated by various Chinese regulators, financial entities, and industry associations.2 The key question therefore becomes how to rapidly shift BRI decision-making and implementation away from “business as usual.” This requires understanding how decision-making around BRI operates and what role sustainability considerations play within it. We need to know, in China and in recipient countries, who are the key actors? Who initiates, approves or rejects, and implements projects? What are their interests,
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