One of the reasons Chinese investments in Africa and Latin America have been so widely welcomed and celebrated is their focus on building rail, road and bridges. These are not only useful for locals, but also stark physical reminders of Chinese power and influence, stretching across the vast expanses of Asia, South America and Africa, connecting mines with ports, cities with farms and factories with raw materials. There is often a huge capital outlay needed to build physical infrastructure, but a good road or rail link can stimulate economic activity in an unprecedented manner.
When I was crossing the Annapurna range in Nepal over a decade ago, our guide commented that the Chinese financed and built a road in that remote region which helped to link distant villages and communities, I also know that the UK, France and other European donors were spending considerable funds on budgetary support to the government, anti-poverty programs and providing clean water facilities throughout Nepal, but there was no doubt which country had made the greatest impression on this particular Nepalese man.
The ripple effect
Around the world and particularly in emerging markets and frontier economies the Chinese have built, are building, or are planning on building new infrastructure projects on an unprecedented scale, creating new opportunities for both those involved directly in their construction, or indirectly firms and individuals stand to gain from the “ripple” effect, as new roads bring more traffic and business, or a rail line allows access to markets previously too far for companies to reach.
Although Chinese firms often bring their own workers for projects, there are always local workers needed for large infrastructure projects, this will mean jobs, but also the chance to supply these workers with everything from food to clothing to housing.
Supplying raw materials, food, construction materials along with other services and goods to Chinese firms, while specialized machinery might be brought over from China, there will still be many products and skills which can only be purchased locally. So if you have a major Chinese project about to start nearby then think about how you can adapt your company to meet their needs.
Piggybacking: The presence of a new railroad, road or other big project can act as a stimulant to the adjoining region, seeing Chinese finance and construction arrive should be a signal to you and your company to think about expanding or adapting operations to take advantage of the changes that will follow a major Chinese project.
Subcontracting: an obvious point, but worth making, the Chinese cannot build everything, there are always opportunities to provide services to a major construction project.
The low cost of capital enjoyed by Chinese firms allow projects to be considered which perhaps for other countries would be unfeasible or simply unthinkable. For example when the Chinese complained about the lack of capacity at Brazilian ports and it was explained to them was not profitable to construct a bigger port (thanks to the high cost of capital in Brazil), this was met with incredulity by the Chinese who have for so long built with little thought to profitability, but rather increasing market share, long term strategic thinking and investment.
Watch out for the development of high status developments such as new airports, hotels and resorts, which again can have enormous knock on effects to the local economy and provide the same kind of incentives an opportunities as major infrastructure developments.
The East Africa Rail project
Kenya’s railways have been underfunded and unloved since colonial times, but now Chinese engagement and financing, along with the desire to draw East African economies closer together has precipitated the re-construction of the region’s moribund rail network.
Africa has the world’s lowest level of intra-regional trade, meaning its economic links with the rest of the world are more important than its neighbours. While tariff barriers and uncomplimentary trade goods are partly to blame, poor transport links between African countries must also take some of the blame. Neglected roads, rail and port facilities that have been the victim of underinvestment and a lack of political will.
At first the new track (running parallel to the old colonial era track) will run from Nairobi to Mombasa. If all goes to plan the track will connect Mombasa on the coast via Kampala in Uganda, with Juba the capital of South Sudan, Kigali to the East and Addis Ababa to the North. The railway will allow the swift movement of freight helping to increase intra-regional trade as businesses can avoid slow potholed roads and bring down transport costs.
The track is being built and financed by the Chinese Import Export Bank (EXIM Bank) – alongside Transcentury Capital and others.
The potential to rapidly increase trade is perhaps what will interest businesses not directly involved in the deal; the railway will help cement Nairobi, Mombasa and Kenya as the economic pivot of the East Africa region. In turn this will help to reduce the cost of transporting goods such as coffee and tea from the interior into the centre of the continent. Anyone who has seen the state of roads and the ramshackle trucks and vans that carry the bulk of goods in Africa or many developing countries will appreciate the importance of efficient transport.
This project demonstrates the power and ambition of Chinese strategy, its experience in building rail links, access to finance, political influence and ambition all combine to make this project possible. Of course it is nowhere complete yet, but I certainly would not wish to bet against it being a resounding success.
Opportunities in Asia
In Asia infrastructure requirements could well be partly met by the recently launched Asian Infrastructure Bank, backed by Beijing, but with the participation of most other Asian and European nations, the Bank could combine Chinese financial firepower along with years of building infrastructure projects in a fast growing developing country. The Bank would be both a competitor and partner to the Japanese dominated Asian Development Bank. Another institution which is on the brink of starting operations is the New Development Bank, aka as the BRICS bank, which is also likely to have an infrastructure focus. These institutions have the gargantuan task of financing Asian infrastructure needs, which are estimated to be the region of USD 800 billion over the next decade.
Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.
This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.