The document discusses financial strategies for funding projects along China's Silk Road Economic Belt initiative. It outlines various sources of funding including the $40 billion Silk Road Fund, Chinese policy banks and state-owned enterprises, multilateral development banks like the AIIB and NDB, sovereign wealth funds, and individual project financing models. Specific projects highlighted that could receive funding include the Gwadar Port in Pakistan, Karot Hydropower Plant in Pakistan, and the Belgrade-Budapest high speed rail line. The document stresses the need for projects to generate revenue and involve local stakeholders to support long-term sustainability of investments.

1. Silk Road Economic Belt (SREB)
Financial Strategies
19 October 2015
1

2. Contents
• Overview
• Program-Specific Funding
• Chinese Sources
• Multilateral Banks
• Institutional Investors
• Individual Project Finance
• Specific Projects
• Financial Strategies
2

3. OVERVIEW
3

4. Context
• Diplomatic strategy shift in China towards a
“Neighborhood Diplomacy” & regional integration
• Support increased investment in rural, western regions
of China
• Increase business opportunities for Chinese firms
• Falling demand for infrastructure construction
domestically
• Improve relations with countries of Eurasia, Africa
• Expand China’s role as global leader in infrastructure
investment
4

5. Silk Road Economic Belt
• Objective: Improve trade & diplomatic relations
between eastern economies with potential &
developed economies in the west through
overland & maritime routes by improving physical
infrastructure & financial frameworks &
functioning.
• Routes
– Economic Belt: connects China to Europe through
Central Asia, Russia, Middle East.
– Maritime Road: connects China to Europe & Africa
through the South China Sea & Indian Ocean
5

6. Target Continents & Countries
• Asia
– East Asia
• China, Mongolia, Korea (investment)
– South Asia
• Pakistan, Sri Lanka, India,
Bangladesh
– South East Asia
• Indonesia, Thailand, Cambodia,
Laos
– Central Asia
• Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan, Uzbekistan
– Middle East
• Afghanistan, Iran, Turkey, Oman,
Egypt, Tunisia
• Europe
– Hungary, Lithuania, Russia,
Serbia, Bulgaria, Germany, Italy,
Switzerland, France, Greece,
• Africa
– South Africa, Kenya, Uganda,
Rwanda, Burundi, South Sudan,
Djibouti, Tanzania,
Mozambique, Gabon, Ghana,
Senegal,
• South America
– Brazil, Peru, Nicaragua
6

7. 7

8. Memoranda of Understanding
• Eurasian Economic Union
– Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan
• Hungary
• Serbia
• Pakistan
8

9. Program Costs
• Estimated $8 trillion of infrastructure
investment needed in Asia 2010-2020
• 68% for new capacity
9

10. Program Revenues
• General budget revenues
• Project & asset-specific revenues
– Toll roads
– Freight & passenger rail revenues
– Utility consumers
– Market listings
– Government/Private transfers of ownership
• Need to identify specific revenue streams
• Need to ensure revenue & economic growth
result from investments
10

11. Program Financing
• National: host country sovereign financing
• State Owned Enterprises
• Bilateral: Chinese development banks
• Multilateral: AIIB, NDB, ADB, AfDB, WB, EBRD
• Program-Specific Funding
• Sovereign Wealth Funds
• Individual Project Financing
11

12. PROGRAM-SPECIFIC FUNDING
12

13. Silk Road Fund
• Silk Road Fund: $40 billion to be put aside
specifically for the Silk Road
– Foreign exchange currency reserves
– Policy Banks (China Exim Bank & China Development
Bank)
– $16 billion Silk Road Gold Fund from three tranches.
• 35% stake taken by Shandong Gold Group, 25% by Shaanxi
Gold Group.
– Silk Road Multicurrency Bonds worth approximately
$4 billion sold June 24th, 2015
13

14. Silk Road Multicurrency Bonds
Tranche Amount (USD)
millions
Maturity % Yield Spread
Largest USD Tranche 1,000 2018 2.205 115
Second Largest USD
Tranche
800 2020 2.932 125
Third Largest USD
Tranche
500 2025 3.957 157.5
Singaporean Tranche 500 2019 2.75 76.2
Dim Sum Tranche 322 2017 3.6 -
Euro Tranche 558 When Percent 100
Total 3,680
14

15. CHINESE SOURCES
15

16. China’s Policy Banks
Bank Est.
2015
Assets
(US$B)
Focus
China
Development
Bank
1912 1,665 Macroeconomic policy support, development
related project financing, & supplementing
infrastructure & energy supply
China Export-
Import Bank
1954 382 Established to promote trade & foreign
investment. Provides concessional funding,
preferential export buyer’s credits, investment
loans for Chinese businesses abroad, seller’s &
buyer’s export credits, & fixed asset & working
capital import credits.
Agricultural
Development
Bank of China
1951 3,703 Growth & modernization of the agricultural sector
by providing loans for related activities.
Total - 5,750.34 -
16

17. Bank Est.
2015
Assets
US$B
2015
Market
Cap US$B
Staff
Bad
Loan %
(2014)
Bank of China
(BoC)
1912 2,458 199.1 308,128 1.18%
China Construction
Bank (CCB)
1954 2,698 212.9 372,321 1.19%
Agricultural Bank of
China (ABoC)
1951 2,545 189.9 493,583 1.65%
Industrial &
Commercial Bank of
China (ICBC)
1984 3,322 278.3 308,128 1.13%
Total - 11,052 880.2 1,482,160 -
Big 4 State-Owned Commercial Banks
The Big Four Banks commercialized their operations in 1995
17

18. Listed Chinese Developers
Developer Symbol
Mkt.
Cap.
US$B
Price 52wk H 52wk L P/E
China Communications
Construction Co Ltd
HKG 1800 34.40 8.92 17 5.33 8.26
China Railway
Construction Corp
Limited
SHA: 601186 26.57 15.89 28.18 4.61 17.02
China Railway Group Ltd HKG: 0390 39.09 6.42 12.3 3.96 10.67
China State Const. Eng.
Corp Ltd
SHA: 601668 33.01 7.23 12.52 2.8 9.28
CITIC Ltd HKG: 0267 41.28 12.06 16.88 12.06 7.54
CRRC Corp Ltd SHA: 601766 65.22 16.04 39.47 4.6 40.19
PetroChina Company
Limited (ADR)
NYSE: PTR 210.60 102.86 150.8 101.64 15.21
SAIC Motor Corporation
Limited
SHA: 600104 38.81 22.98 29.18 15.27 8.90
As of 2:00 PM 7/8/15
18

19. NATIONAL GOVERNMENTS
19

20. National Governments
• SREB will connect with national government
infrastructure & development programs
• Much SREB infrastructure already part of
existing infrastructure plans
• Need to rationalize & prioritize projects by
interested parties
• Need to garner support for SREB among
member country governments
20

21. State Owned Enterprises (SOE)
• Use of SOEs to carry for project financing,
construction & operations
• National railway, power, port, road & other
companies
• Large balance sheets
• May be able to access international capital
markets
• May leverage opportunity to reorganize
operations, increase investment
21

22. Kazakhstan’s Infrastructure
• $33 billion State Program of Accelerated Industrial &
Innovative Development envisions 85% private financing
• In March 2015, China & Kazakhstan signed 33 deals worth
$23.6 billion
– Related projects include metal industries, oil refining,
manufacturing, & hydropower
• Construction of Khorgos dry dock for rail on the Chinese
border; a special economic zone on the Kazakh side, & a
duty free zone on the Chinese side.
• Kazakhstan Temir Zholy (KTZ), pledged $44 billion to reduce
travel from southwest China to Germany from 14 days to 10
• Shipping containers from China to Europe tends to cost
$5000 less by sea than by land
22

23. India
• Founding Member of NDB & AIIB
• Significant interests in SREB region
• Reserve Bank of India
• New tax allocation procedures provide more funding
for the states to empower growth
• Budget allocations for infrastructure
– Remaining villages without power to be supplied by 2020
– 100,000 km of new roads to be added to facilitate rural
travel.
• Proposal for creation of National Investment in
Infrastructure Fund, with base capital of $3.25B.
23

24. Iran
• Keystone of SREB
• Awaiting nuclear deal & sanctions relief from P5+1
• China already a key economic partner, including in
infrastructure
• Chinese National Machinery Corporation has
previously supplied trains & buses to the Tehran Metro
& Iran Railways, including a 2006 contract for 178
railway passenger cars
• The same company’s consortium was in 2014 awarded
a 400km Tehran-Mashhad HSR contract
• Recent opening of Kazakh-Iran Silk Road rail link
24

25. MULTILATERAL DEVELOPMENT
BANKS (MDB)
25

26. Multilateral Development Banks
(MDB)
MDB Founded Subscribed
Capital
(US$B)
Annual
Investment
(US$B)
Asia/SREB
Portfolio
(%)
Asian Infrastructure Investment
Bank
2015 100 TBD 100
New Development Bank 2015 100 TBD ~75
World Bank 1944 223 25-60 ~40
Asian Development Bank 1966 160 100
European Bank for
Reconstruction & Development
1991 34 8-10 100
European Investment Bank 1958 280 50-90 ~90
Islamic Development Bank 1975 11 8.0-10 ~90
26

27. Asian Infrastructure Investment Bank
(AIIB)
• 50 member countries signed the Articles of
Agreement on June 29th, 2015
• Asia focus with Asia domination of voting
weights
• Initial capital of $100 billion (half from China
itself)
• Primary focus on SREB
27

28. New Development Bank
• Created to promote sustainable development projects among the
BRICS nations
– Funding & other support to also go towards other borrowing countries
– BRICS nations to maintain a combined majority stake of 55%
• Initial capital set at $50 billion, to be increased to $100 billion
– $10 billion from each founding country
• Additional creation of the Contingency Reserve Arrangement to
hold $100 billion
– Liquidity protection from balance of payments issues
– Funding Breakdown:
China 41%
Russia, Brazil, India 18% each
South Africa 5%
28

29. INSTITUTIONAL INVESTORS
29

30. Top 10 Sovereign Wealth Funds
Country Fund Name Assets in Billions
US$
Founded Infra
Allocation
(%)
Norway Government Pension Fund – Global 882 1990
Abu Dhabi Abu Dhabi Investment Authority 773 1976
Saudi Arabia SAMA Foreign Holdings 757 ~1952
China China Investment Corporation 653 2007
Kuwait Kuwait Investment Authority 548 1953
China SAFE Investment Company 547 1997
Hong Kong HK Monetary Authority Investment
Portfolio
400 1993
Singapore Government of Singapore Investment
Corporation
344 1981
Qatar Qatar Investment Authority 256 2005
China National Social Security Fund 236 2000
30

31. Russian Direct Investment Fund (RDIF)
• $10 billion fund created in 2011 to make equity
investments primarily in the Russian economy
• Subsidiary of Vnesheconombank (VEB), Russia’s
state development bank
• Co-investment vehicle designed to attract other
large investors
• Attracted more than $15 billion of foreign capital
through long-term strategic partnerships
• Focus on infrastructure, real estate, retailers
• Model for the region?
31

32. RDIF Partnerships
32

33. RDIF Portfolio
33

34. INDIVIDUAL PROJECT FINANCING
34

35. Project Finance
• Method of isolating project risk and allocating
that risk efficiently
• Variety of contract types and options to
achieve this
– Dependent on the type and scope of the project
and level of public and private participation
35

36. Typical Project Finance Arrangements
36

37. Delivery Options
37

38. Risk Transfer Summary
Typical Risk Allocation Arrangements
Public Authority Concessionaire Subcontractor
Development Phase
Planning & environmental process 
Political will 
Regulatory 
Site
Permitting   
Procurement  
Financing 
Construction Phase
Engineering & construction 
Changes in market conditions 
Operation Phase
Traffic 
Competing facilities 
Operations and maintenance 
Appropriation  
Financial default risk to public agency 
Refinancing 
Political 
Regulatory 
Handback 38

39. SPECIFIC PROJECTS
39

40. Projects
• Gwadar Port & Pakistan Highway Connection
• China-Pakistan Economic Corridor
• Karot Hydropower Plant in Pakistan
• Hungary-Serbia Railway Line
• Kazakhstan’s Infrastructure
• Trans-Siberian Railway Extensions
40

41. • Gwadar’s Port-Kashgar, China Economic
Corridor
• Part of a larger $46 billion SREB investment
from China in power (increase capacity by 10K
MW) & transportation
• Pipelines to connect Iran to processing
facilities in Gwadar for export to China
• Reduce transportation time & costs vs.
maritime routes
China-Pakistan Economic Corridor
41

42. Gwadar Port in Pakistan
• Construction of Phase I basic local infrastructure & docks began
2002
– $248 million, 60% of which was from China
• Operations transferred to the Port of Singapore Authority in 2007
• Operations transferred to China Overseas Port Holding Company in
2013.
• Additional $1.62 billion in financing to construct roads, rail, &
pipelines over coming years
• Port and surrounding industrial areas classified as Special Economic
Zone
– Likely to include tax holidays for covered businesses, exemption from
value-added taxes, & other business incentives.
• Connections from the Port will lead up into China’s western
provinces, creating the China-Pakistan Economic Corridor
42

43. Karot Hydropower Plant in Pakistan
• $1.65 billion, 720MW
• 30-year Build-Own-Operate-Transfer (BOOT)
• Operations to begin by 2020
• Hong Kong-based China Three Gorges South Asia Ltd
• 1st project to be funded with monies from the Silk Road
Fund
• Expected Financing
– $125 million investment by Silk Road Fund for a 15% stake
– $125 million IFC investment
– Additional financing expected from China Exim Bank, China
Development Bank
43

44. Belgrade-Budapest High Speed Rail
• MOU signed between Hungary, Serbia, &
China to recognize the vision of the Silk Road.
• High-speed railway to be built from Budapest
to Belgrade to reduce travel times from eight
hours to three hours.
– Part of a larger rail network to connect eventually
to Greece & various central & western European
nations.
44

45. Trans-Siberian Railway
• Project Cost $242 billion
• Reduce transit from six days to 2
• China financing majority of cost
• Construction by China Railway Group, also building Moscow-Kazan
HSR (replaced Alstom)
• In order to be competitive with maritime travel (to Spain from
China), costs to be held at around $0.50/km for each container &
take only 10-12 days
– Rail charges stand at $0.60/km through the China Railway Group, &
about $0.30/km by Russian Railways
– As of 2014, it takes 21 days for a train to travel from China to Spain
• 80% of world global trade is done by ship, but trans-Eurasian rail is
growing
45

46. Trans European Network-Transport
46
• Trans European Networks (TEN) created by
1957 Treaty of Rome
• TENs for Transport, Energy and
Telecommunications
• Initial Action Plans approved in 1990
• TEN-T investment costs estimated at €900
billion in 1996, €400 billion invested by 2009
• Under the Connecting Europe Facility (CEF),
€26.25 billion will be made available from the
EU’s 2014-2020 budget to co-fund TEN-T
projects in the EU Member States.

47. FINANCIAL STRATEGIES
47

48. Financial Strategies
• Provide initial investment stimulus
• Transfer/sale of assets once up & running
• Complementary projects by national
governments
• Need to rationalize scarce capital
• Attract private capital when possible &
appropriate
• Develop common ownership, shared
benefits to support overall program
48

49. Issues to Address
• Need for revenues, not just financing
• Need to incorporate local suppliers, contractors
to address concerns of China-only inputs
• Need for long-term operations & maintenance
strategies
• Trade & economic cooperation need to follow
infrastructure investment
• Political issues to address among & within SREB
countries, not least Afghanistan, Iran, Iraq, Syria
49

50. Thank You!
Brien Desilets
Managing Director
bdesilets@claretconsult.com | www.claretconsult.com
50