1. Operationalizing
the
‘Belt
and
Road’
in
2016
Implementation
ideas
from
Business/Think20
and
Pilot
Projects
for
the
Middle
Corridor
Anna
Kurguzova,
Ussal
Sahbaz1
January
2016
Introduction
The
Belt
and
Road
initiative
(B&R)
that
focuses
on
connectivity
and
cooperation
among
countries
primarily
in
Eurasia
was
launched
by
the
People’s
Republic
of
China
in
2013.
Projects
to
develop
infrastructure
and
facilitate
trade
across
countries
in
the
B&R
framework
will
require
substantial
private
sector
involvement,
both
in
terms
of
financing
and
technical
expertise
that
businesses
can
bring
in
through
closer
public-­‐private
collaboration.
The
B&R
is
an
excellent
opportunity
to
pilot
under
the
Chinese
G20
leadership
in
2016
some
of
the
infrastructure-­‐related
recommendations
developed
by
the
Business-­‐20
and
Think-­‐20
engagement
groups
in
2015.
Many
potential
investors
are
often
wary
of
participating
in
infrastructure
projects:
the
variety
of
project
structures,
the
lack
of
standardization
in
commercial
arrangements,
and
the
scarcity
of
readily
available
data
create
high
due-­‐diligence
costs
that
discourage
private
investors;
uncertain
regulatory
environment
puts
investors
off
long-­‐term
projects.
These
challenges
are
particularly
acute
across
B&R
countries,
which
are
not
perceived
to
be
equally
stable
for
infrastructure
investment,
often
fall
short
of
appropriate
capabilities
and
capacities
to
prepare
bankable
projects,
and
have
limited
financial
resources.
First
concrete
steps
in
2016
towards
implementation
of
infrastructure
projects
across
the
B&R
are
needed
to
showcase
whether:
(a)
bilateral
and
multilateral
governmental
cooperation
platforms
can
succeed
in
operationalizing
the
B&R
initiative,
and
(b)
private
sector
interest
in
the
B&R
can
be
assured.
This
paper
provides
specific
policy
proposals
to
implement
along
the
‘Middle
Corridor’
of
the
B&R
initiative
based
on
the
Business-­‐20/Think-­‐20
policy
work
carried
out
during
the
Turkish
2015
cycle,
and
develops
two
pilot
project
ideas.
The
following
proposals,
if
implemented,
can
help
stakeholders
improve
project
preparation,
and
increase
the
number
of
bankable
projects,
eventually
attracting
more
private
sector
funds
into
infrastructure
projects
across
the
B&R:
1. Development
of
Infrastructure
Project
Preparation
Facilities;
2. Provision
of
Political
Risk
Insurance;
3. Preparation
of
National
Infrastructure
Investment
Strategies;
and
4. Improvements
in
Soft
Infrastructure:
Trade
Facilitation.
Proposed
actions
to
facilitate
the
development
of
infrastructure
can
be
piloted
in
two
actual
projects:
at
the
Caspian
Crossing,
and
in
cross-­‐border
e-­‐commerce
development.
1
This
paper
is
authored
based
on
a
presentation
at
the
One
Belt
One
Route
conference
in
Beijing
held
on
December
11,
2015,
organized
by
Reinventing
Bretton
Woods
Committee
and
Center
for
China
in
the
World
Economy
of
Tsinghua
Universithy.
The
authors
are
thankful
to
the
participants
of
the
conference
as
well
as
Selim
Koru
and
Timur
Kaymaz
of
TEPAV
for
their
contributions.

2. 2
1. Background:
The
Middle
Corridor
of
the
‘Belt
and
Road’
The
Belt
and
Road
initiativei
(B&R)
was
launched
by
Xi
Jinping,
President
of
the
People’s
Republic
of
China,
in
the
fall
of
2013.
Since
then,
China
initiated
the
establishment
of
two
international
financial
institutions
—
Asian
Infrastructure
and
Investment
Bank
(AIIB)
and
the
New
Development
Bank
(also
known
as
the
BRICS
Bank)
—
and
the
Silk
Road
Fund,
which
are
expected
to
play
a
significant
role
in
financing
projects
under
the
Belt
and
Road
framework.
Yet,
projects
to
develop
infrastructure
and
facilitate
trade
in
65
countries
in
the
B&R
framework,
some
of
which
have
the
worst
infrastructure
connectivity
in
the
world,
will
also
require
substantial
private
sector
involvement.
First
concrete
steps
in
2016
towards
implementation
will
showcase
whether:
(a)
bilateral
and
multilateral
governmental
cooperation
platforms
can
succeed
in
operationalizing
the
B&R
initiative,
and
(b)
private
sector
interest
in
the
B&R
can
be
assured.
The
Belt
and
Road
initiative
consists
of
two
components
–
the
inland
Silk
Road
Economic
Belt
and
the
21st
Century
Maritime
Silk
Road,
and
goes
through
three
complementing
routes
broadly
defined
as:
the
Northern
Corridor
(from
China
through
Kazakhstan,
Russia,
and
the
Baltic
states),
the
Middle
Corridor
(through
Central
Asia,
South
Caucuses,
and
Turkey),
and
the
Southern
Corridor
(through
Iran
and
Turkey).
The
Northern
Corridor
is
a
functioning
route,
has
the
fewest
border
crossings,
however,
is
hindered
by
weather
conditions
in
Siberia.
The
Southern
Corridor
is
plagued
by
the
most
politically
and
bureaucratically
problematic
border
crossings.
The
Middle
Corridor
is
physically
the
shortest
route,
spans
many
countries
–
in
contrast
with
both
the
Northern
and
Southern
Corridors,
and
indeed
represents
THE
regional
economic
development
initiative
(see
Map
1
below).
Map
1:
The
Middle
Corridor
of
the
‘Belt
and
Road’.
Source:
Tepav’s
analysis

3. 3
China
chairs
the
G20
in
2016.
Infrastructure
development
and
trade
facilitation
is
a
substantial
part
of
the
G20
agenda,
and
as
such
constitute
a
large
portion
of
the
recommendations
developed
by
the
Business-­‐202
and
Think-­‐203
engagement
groups
to
G20
leaders.
B&R
is
an
excellent
opportunity
to
pilot
some
of
these
recommendations
under
the
Chinese
G20
leadership.
Especially
important
will
be
the
G20
Troika
for
2016
consisting
of
Turkey,
China,
and
Germany
–
two
countries
that
lay
on
the
opposite
ends
of
the
B&R
initiative,
and
one
that
seeks
to
function
as
the
bridge
connecting
Asia
with
Europe.
This
paper
provides
specific
policy
proposals
to
implement
along
the
‘Middle
Corridor’
of
the
B&R
initiative
based
on
the
B20/T20
policy
work
carried
out
during
the
Turkish
2015
cycle,
and
further
develops
two
pilot
project
ideas.
2. How
to
catalyze
private
money
into
infrastructure
investments
across
B&R
countries?
Costly
infrastructure
projects
across
the
B&R
initiative
require
both
public
and
private
sector
funds.
The
private
sector
may
play
a
bigger
role
in
financing
infrastructure
projects,
but
market
inefficiencies
and
legislative
and
regulatory
disincentives
constrain
private
capital
that
could
fund
infrastructure
projects.
While
it
is
beneficial
to
bring
in
the
private
sector
early,
businesses
are
often
wary
of
participating
during
the
early
project
stages,
as
project’s
objectives
and
risks
are
unclear.
A
cost
reimbursement
mechanism
for
projects
that
will
successfully
achieve
financial
close
can
address
an
early-­‐stage
financing
gap.
A
typical
infrastructure
project
cycle
consists
of
four
stages:
(1)
Project
preparation
and
evaluation,
(2)
financing,
(3)
procurement
and
approvals,
and
(4)
operations
and
asset
management.
Attracting
private
funds
to
infrastructure
requires
initiatives
that
improve
various
elements
across
all
stages
of
infrastructure
project
cycle,
however,
this
paper
proposes
actions
in
the
first
two,
as
they
are
the
most
critical
ones
for
the
development
of
the
B&R
in
2016.
Governments
across
B&R
countries
need
to
build
a
credible
national
vision
of
planned
projects
–
especially
in
key
B&R
infrastructure
–
to
attract
more
investors.
Critical
improvements
in
‘soft’
infrastructure
–
trade
facilitation
–
are
needed
as
well.
2.1. Infrastructure
Project
Preparation
Facilities
at
the
Project
Preparation
and
Evaluation
Stage
The
needed
infrastructure
projects
across
the
B&R
risk
failing
to
progress
beyond
the
concept
stage,
primarily
because
of
limited
project
preparation
resources,
and
countries
falling
short
of
appropriate
capabilities
and
capacities
to
prepare
bankable
projects.
Within
the
B&R,
infrastructure
project
preparation
facilities
(IPPF)
can
provide
venture
funds
that
pay
for
complex
and
lengthy
project
preparation
and
development
to
bring
projects
to
bankability.
IPPFs
can
drive
the
preparation
phase
for
B&R
infrastructure
projects
by
conducting
technical,
environmental,
social
and
economic
studies.
IPPF
will
ensure
project
preparation
of
a
high
quality,
thereby
enhancing
the
pipeline
of
bankable
projects,
and
opening
up
more
projects
to
investors.
2
B20
Infrastructure
and
Investment
policy
paper,
B20
Turkey,
2015
Link;
B20
Trade
policy
paper,
B20
Turkey,
2015
Link
3
Infrastructure
Financing
and
Sustainable
Development,
T20
Turkey,
2015
Link

4. 4
IPPFs
should
be
financially
sustainable
–
not
only
rely
on
grants
or
donor
funds,
rather
have
an
adequate
recovery
mechanism
for
project-­‐preparation
expenses.
The
following
three
models
for
B&R
IPPFs
with
distinct
recovery
types
can
be
used:
no
recovery
/
cost
plus
margin
/
equity
recovery.4
No
recovery:
no
expenses
are
recovered.
Public
interest
incentive
is
highest
under
this
model,
however,
quality
optimization
and
preparation
cost
incentives
are
limited.
Cost
plus
margin:
project
expenses
are
recovered,
and
there
is
a
fixed
margin
paid
on
top
of
preparation
expenses.
Incentives
to
optimize
costs
and
quality
are
higher
than
under
the
‘no
recovery’
model,
but
still
limited.
Public
interest
incentive
is
high.
Equity
recovery:
preparation
costs
are
converted
to
equity.
The
IPPF
can
either
retain
an
equity
stake
or
sell
off
equity
to
sponsor
upon
financial
close.
Under
this
model,
the
IPPF
can
have
a
strong
incentive
to
optimize
preparation
cost
in
the
hope
of
bringing
the
project
to
a
viable
tender.
IPPF
interest
can
be
aligned
with
that
of
incoming
investors
–
the
IPPF
will
participate
in
the
asset’s
upside,
as
well
as
in
its
downside
risks.
Under
this
model,
IPPF
funds
can
be
locked
in
for
an
extended
period,
which
will
limit
the
IPPF
cash
flow.
Hybrid
recovery
schemes,
depending
on
a
number
of
parameters,
such
as
the
geography,
project
cycle
stage,
or
availability
of
financing,
can
become
an
optimal
for
various
B&R
infrastructure
projects.
Project
should
be
selected
not
only
based
on
financial
returns,
but
also
on
economic
and
social
returns.
Infrastructure
can
spur
innovation,
increase
host-­‐government
capacity,
or
improve
policy
environment.
Careful
ex-­‐ante
assessment
of
projects
is
necessary.
Project
selection
approach
should
be
optimized
to
avoid
wasting
project-­‐preparation
resources,
and
go
in
stages:
project
identification,
pre-­‐feasibility,
and
feasibility.
The
main
benefit
of
the
“stage”
approach
is
that
unfeasible
projects
are
identified
early
in
the
process.5
Within
the
B&R
initiative,
project
preparation
facilities
can
be
developed
by
the
Asian
Infrastructure
Investment
Bank
and
the
Belt
and
Road
Fund
in
partnership
with
public-­‐
and
private-­‐sector
players.
2.2. Political
Risk
Insurance
at
the
Financing
Stage
B&R
countries
are
not
perceived
to
be
equally
stable
for
infrastructure
investments.
Political
risk
insurance
for
B&R
infrastructure
projects
can
be
attractive
for
investors
who
will
otherwise
struggle
to
finance
projects
in
these
countries.
By
reducing
investment
risk
to
an
acceptable
level,
political
risk
insurance
will
encourage
investors
to
diversify
their
infrastructure
portfolio
and
increase
the
amount
they
invest
in
infrastructure
assets
across
B&R
countries.
Political
risk
insurance
should
be
available
for
fundamental
risks
such
as
risks
of
expropriation,
breach
of
contract,
currency
restrictions
and
inconvertibility.6
Those
risks
are
well-­‐standardized
as
trigger
events
are
well-­‐defined.
More
subtle
regulatory
risks
such
as
a
change
of
industry-­‐specific
regulation
can
be
covered
in
special
cases.
4
A
Principled
Approach
to
Infrastructure
Project
Preparation
Facilities,
World
Economic
Forum,
June
2015
Link
5
A
Principled
Approach
to
Infrastructure
Project
Preparation
Facilities,
World
Economic
Forum,
June
2015
Link
6
Mitigation
of
Political
&
Regulatory
Risk
in
Infrastructure
Projects,
World
Economic
Forum,
February
2015
Link

5. 5
Within
the
B&R,
a
new
vehicle
can
be
established
to
coordinate
with
existing
providers
of
political
risk
insurance,
both
multilateral
and
national
providers,
or
even
private
insurance
such
as
the
Multilateral
Investment
Guarantee
Agency
of
the
World
Bank
(MIGA)
and
export
credit
agencies
like
Sinosure
(China).
Existing
providers
of
political-­‐risk
insurance
should
be
encouraged
to
make
these
products
more
available
to
potential
investors
in
B&R
countries
investing
in
infrastructure
projects,
as
better
coordination
across
the
existing
providers
of
political-­‐risk
insurance
will
facilitate
increased
usage
amongst
investors.
It
is
also
beneficial
to
partner
with
local
governments
to
reduce
uncertainty
about
national
political
decisions,
and
adopt
a
comprehensive
approach
to
transnational
infrastructure
project
management.
The
Belt
and
Road
infrastructure
projects
will
have
costs
and
benefits
occurred
in
multiple
countries,
and
the
challenge
is
to
estimate
costs
and
benefits
of
infrastructure
projects
across
countries,
and
assess
the
extent
of
spillover
externalities.
Spillover
externalities
tend
to
go
uncounted
in
formal
project
investment
analyses,
and
hence
to
be
unfairly
distributed
across
countries
involved.
2.3. National
Infrastructure
Investment
Strategies
Since
the
infrastructure
financing
can
be
done
only
by
a
combination
of
private
and
public-­‐sector
involvement,
governments
across
B&R
countries
need
to
build
a
credible
national
vision
of
planned
projects
–
especially
in
key
B&R
infrastructure
–
to
attract
more
investors.
In
addition
to
the
uncertainty
and
risks
related
to
long-­‐term
financing,
the
lack
of
clear
pipeline
of
projects
make
it
difficult
for
private
investors
to
make
investment
decisions,
and
discourages
them
from
investing
in
potentially
attractive
projects.
Strong
political
commitment
to
a
credible
vision
could
alleviate
investor
uncertainty
and
enable
productive
collaboration
between
governments
and
investors.
During
the
Turkish
G20
presidency
in
2015,
G20
states
developed
ambitious
country-­‐specific
investment
strategies
which
bring
together
concrete
policies
and
actions
to
improve
the
investment
ecosystem.
Non-­‐G20
members
across
the
B&R
are
advised
to
do
the
same.
Governments
should
be
explicit
about
the
target
financing
structure,
including
the
share
and
type
of
financing
in
each
project,
and
about
the
level
of
participation
in
the
project
preparation
and
delivery.
This
will
make
the
public
sector
more
disciplined
about
target
setting
and
decrease
ambiguity
around
the
role
of
the
private
sector,
thus
attracting
more
funds.
It
is
advisable
to
publish
an
integrated
pipeline
of
greenfield
infrastructure
projects
across
B&R
countries
both
publicly
and
privately
financed,
including
cost-­‐benefit
analysis,
business-­‐model
evaluation
and
total
cost
of
ownership,
and
sustainability
evaluation,
with
a
clearly
defined
time
horizon.
Published
documentation
should
include
enough
detail
to
create
confidence
that
the
appropriate
due-­‐diligence
has
been
conducted
and
that
projects
have
been
prioritized
according
to
a
country’s
and
region’s
long-­‐term
vision.
For
B&R
transnational
infrastructure
projects
to
flourish,
they
need
a
conducive
environment,
which
includes
an
appropriate
regulatory
system
in
all
countries,
institutions
across
countries
should
have
the
right
management
capacities
and
capabilities
in
the
public
sector
(e.g.
ministries
and
public
agencies),
as
well
as
in
national
and
regional
finance
institutions
that
take
part
in
B&R
projects.

6. 6
Environments
of
each
B&R
participating
country
should
be
analyzed.
Preparing
country
papers
may
become
beneficial
–
they
will
discuss
current
status
of
relevant
national
and
cross-­‐country
infrastructure,
regional
integration
potential,
challenges,
and
regulatory
environment
and
governance.
The
aim
of
these
papers
is
to
identify
challenges
in
B&R
transnational
infrastructure
project
management
and
their
specific
relevance
to
the
B&R
region,
and
to
outline
leading
practices
for
addressing
them.
2.4. Improving
Soft
Infrastructure:
Trade
Facilitation
In
line
with
the
Trade
Facilitation
Agreement
(TFA)
implementation
process,
countries
across
B&R
should
establish
and
strengthen
their
national
trade
facilitation
committees
to
systematically
support
and
coordinate
implementation
of
trade
facilitation
measures.
The
committees
should
have
a
balanced
representation
from
the
public
and
private
sectors,
and
should
oversee
effective
TFA
implementation
and
identify
solutions
to
regulatory,
administrative,
legislative,
and
cost
barriers
to
cross-­‐border
trade.
One
of
the
major
benefits
of
including
all
stakeholders
in
this
activity
is
that
the
public
and
private
sector
stakeholders
collectively
are
able
to
prioritize
different
measures
of
the
TFA
in
accordance
with
their
importance
to
the
country’s
goals
as
well
as
the
sequence
in
which
they
should
be
implemented.
Countries
across
B&R
should
commit
to
high-­‐quality
and
prioritized
high-­‐impact
implementation
plans.
Among
immediate
steps
countries
can
take
to
accelerate
implementation
is
to
adopt
the
‘single
window’
approach.
Implementation
of
a
‘single
window’
system
enables
cross-­‐border
traders
to
submit
regulatory
documents
–
such
as
customs
declarations,
and
applications
for
import/export
permits
–
at
a
single
location,
or
to
a
single
entity.
Implementation
of
a
‘single
window’
system
can
reduce
clearance
times
and
reduce
the
number
of
duplicative
transactions.
Countries
can
adopt
the
‘single
window’
system
by
expanding
pre-­‐arrival
processing
to
reduce
clearance
time
and
cost,
improving
transparency
and
predictability
of
the
advance-­‐ruling
mechanism,
and
developing
digital
systems
in
order
to
increase
electronically
executed
operation
and
risk
assessment.
3. Pilot
Projects
Proposed
actions
to
facilitate
the
development
of
infrastructure
can
be
piloted
in
two
actual
projects
of
the
Belt
and
Road
initiative:
at
the
Caspian
Crossing,
and
in
cross-­‐border
e-­‐commerce
development.
3.1. Caspian
Crossing
The
Caspian
Crossing
is
currently
highly
expensive
and
irregular.
Erratic
schedule
of
the
two
ships
under
operation
leads
to
long
waiting
periods,
making
shipments
hard
to
plan.
Also,
although
the
passage
is
short,
the
prices
are
prohibitively
high.
As
of
2015,
the
Baku-­‐Aktau
route,
one-­‐way,
costs
$1200,
while
Baku-­‐Turkmenbashi
costs
$1100,
meaning
$4
and
$6.5
per
nautical
mile
respectively.

7. 7
The
Ro-­‐Ro
shipment
from
the
Turkish
port
of
Mersin
to
Italy’s
Trieste,
in
comparison,
costs
$1.7
See
Map
1
above.
For
the
trans-­‐Caspian
passage
to
be
commercially
feasible,
critical
improvements
in
physical
infrastructure,
and
alignment
of
‘soft’
infrastructure
systems
of
customs
and
ports
in
the
region
are
needed.
Caspian
Crossing
lines
should
be
opened
for
competition,
with
more
private
investors’
funds
available
for
infrastructure
improvements.
The
development
of
the
Caspian
Crossing
is
critical
not
only
for
regional
trade,
but
also
for
the
establishment
of
a
Middle
Corridor
of
the
Belt
and
Road.
In
line
with
the
actions
proposed
in
Part
2
of
this
paper,
the
following
tools
are
available
for
stakeholders
to
make
necessary
investments
feasible
and
ensuring
sustainable
operations:
1. Infrastructure
project
preparation
facilities:
IPPFs
with
hybrid
recovery
mechanisms
developed
by
the
Asian
Infrastructure
Investment
Bank,
the
Belt
and
Road
Fund,
and
other
stakeholders
may
become
critical
in
supporting
the
development
of
the
regional
infrastructure,
enhancing
the
delivery
of
better
and
more
efficiently
prepared
sea
and
land
infrastructure
of
the
Caspian
Crossing.
2. Political
risk
insurance:
Political
risk
insurance
for
fundamental
risks
such
as
the
risk
of
expropriation
should
be
made
available
for
potential
investors
willing
to
fund
infrastructure
projects
of
the
Caspian
Crossing.
Multilateral
and
national
providers,
as
well
as
private
insurers
can
coordinate
the
initiative.
3. B&R
transnational
infrastructure
project
management:
Countries
of
the
Caspian
Crossing
should
adopt
a
comprehensive
approach
to
transnational
infrastructure
project
management,
to
coordinate
the
work
of
ports
and
other
infrastructure
facilities.
3.2. Facilitating
Cross-­‐border
e-­‐Commerce
It
is
advisable
to
stimulate
collaboration
within
B&R
economic
belt,
in
particular
encourage
innovation
in
trade.
Countries
can
launch
pilot
e-­‐commerce
services
for
cross-­‐border
trade
in
selected
cities
or
regions
across
the
B&R.
Yet,
inadequate
‘hard’
and
‘soft’
infrastructure
–
including
poor
Internet
connectivity,
transportation
infrastructure,
as
well
as
policy,
trade
facilitation,
and
resource
constraints
–
can
hamper
e-­‐commerce
initiatives.
On
the
physical
infrastructure
side,
efforts
should
be
given
to
improving
telecommunication
infrastructure,
trade-­‐related
transportation
infrastructure,
such
as
roads
and
ports.
Stakeholders
should
consider
implementing
proposed
actions
under
Part
2
“How
to
catalyze
private
money
into
infrastructure
investment
across
B&R
countries?”
to
facilitates
public
and
private
investments
in
e-­‐
commerce
physical
infrastructures.
On
the
‘soft’
measures,
countries
can
establish
one-­‐contact
information
centers
to
support
companies
around
legislation
issues
concerning
cross-­‐border
e-­‐commerce.
Local
legislation
on
imports
and
exports,
sales
legislation,
and
consumer-­‐protection
rules
vary
across
B&R
countries.
Compliance
with
such
regulations
is
especially
burdensome
for
a
small
e-­‐trader,
particularly
when
they
are
not
fully
aware
of
what
the
rules
entail.
They
usually
lack
required
resources
to
collect
and
analyze
relevant
information
for
the
countries
where
they
operate.
Consequently,
many
companies
decide
not
to
export,
or
learn
by
“trial
and
error”
and
risk
violating
local
laws.
Thus,
one
immediate
7
Ministry
of
Economy
of
Turkey,
2016

8. 8
barrier
to
tackle
is
the
“lack
of
information”.
B&R
countries
should
establish
one-­‐contact
information
centers
to
support
companies
around
legislation
issues
concerning
cross-­‐border
e-­‐
commerce.
Customs
issues
are
significant
concern
for
e-­‐traders,
a
large
majority
of
which
are
smaller
companies
that
deal
with
large
numbers
of
small
shipments;
this
makes
them
more
sensitive
to
costs
incurred
as
a
result
of
customs
procedures.
B&R
countries
should
discuss
trade-­‐facilitation
measures
in
order
to
improve
custom
procedures
with
a
direct
focus
on
e-­‐commerce
challenges.