Without doubt, the Belt and Road initiative has been a large-corporate and state-owned-enterprise play to date. Yet without more participation from small- and medium-sized enterprises (SMEs) and positive economic impact for all parties involved, its long-term success will be limited.
Nowhere is this more true than in ASEAN, where SMEs form the backbone of the economy. They account for some 90 per cent of total establishments in ASEAN; contributing at least 51 per cent of total employment and more than 30 per cent of GDP.1 So if Belt and Road’s aim of bringing trade and greater connectivity is to be realised in ASEAN, there needs to be a level-playing field for SMEs in the region.
While larger firms have clear advantages – in getting administrative approvals, government support and policy bank loans – SMEs’ participation has been hindered by a lack of policy support in financial, administrative and business matters,2 according to a report by Boston Consulting Group and China Development Research Foundation.
The model that has impeded SMEs thus far is changing though, according to Surya Bagchi, Standard Chartered’s Global Head of Project and Export Finance. “As large Belt and Road infrastructure projects are implemented around the world, there are significant local components that are creating opportunities for participation by domestic supply chains,” he said.
Certain countries now also specifically ask that local employment is incorporated, Bagchi added, which helps to build acceptance. “Belt and Road is definitely making efforts to be inclusive – for local SMEs, but also for skilled and semi-skilled labour and community engagement.”
Capability upgrade via partnerships
An advantage held by local SMEs is that they tend to be more familiar with local market operations that can help Belt and Road partners. “Local ASEAN players, especially those from more complex markets in the region, are more familiar operating in their home markets,” said Jiten Arora, Standard Chartered’s Global Head of Commercial Banking. “They possess in-depth local knowledge of regulatory, legal and political systems, business practices, language and culture.”
And with the new business opportunities that SMEs could access via Belt and Road, partnerships with larger companies should create a win-win situation. “Partnerships between mid-corporate firms and larger infrastructure players will enable them to leverage significant infrastructure opportunities – from Belt and Road to PPPs adopted by many ASEAN governments,” continued Arora.
Partnering with larger contractors and integrating into their Belt and Road supply chains could also act as a springboard for local SMEs to venture into new markets.
“The larger players bring stronger financial capabilities and more resources to achieve efficiencies and economies of scale,” said Arora. “Through partnerships, SMEs can upgrade their capabilities as they access new markets, new technologies and new projects.”
While partnerships with large, experienced companies can provide a route to the Belt and Road opportunity, SMEs inevitably face scale constraints. Indeed, one of the greatest deterrents for SMEs looking to expand are physical and financial capacity, according to Bagchi. “If a company gets stuck on one project and there is a time or cost overrun, or you don’t get paid on time, this can be threatening for small companies which don’t have much of a cushion. Which is why it’s important to be very disciplined during the bidding process,” he added.
Bagchi urged SMEs to be prepared to lose a few bids before winning one. Overeagerness can easily hurt a company, something smaller firms cannot afford.
As a starting point, SMEs should remember to engage bank partners early, urged Arora. Gaining access to more sources of financing – be it bonds, syndicated loans or even private equity financing through banks – could also help to free-up capital.
Aside from providing suitable cash management solutions, financial institutions can also design appropriate hedging strategies to mitigate risks. “Banks can add value by looking at the viability of each project and advising on feasibility by considering numerous aspects – including partnerships, financing and risk management,” Arora added.
Level playing field
At the government level, there is clear acknowledgement that more needs to be done to draw in smaller corporations to Belt and Road projects. At the latest Belt and Road Forum in April 2019, President Xi Jinping encouraged “the participation by enterprises from all countries…including micro, small and medium enterprises.”3
At the regional level, ASEAN governments have been working to create a more conducive environment for SMEs to expand their operations beyond their borders for some time. For example, in 2018, Singapore set up a dedicated new agency called Infrastructure Asia, which aims to bring together Singapore-based and international players for infrastructure projects across the region.
Yet for Belt and Road, state-owned enterprises still dominate current participation – according to statistics from China’s State Information Center.4 More needs to be done at the central level, therefore, to attract SMEs to engage in Belt and Road. The establishment of a regional cooperation platform and an increase in information transparency would both help, according to the same report by Boston Consulting Group.5
A Belt and Road project transaction platform is another idea detailed in the same report – where state agencies could publicise projects. This would act as an information resource centre for Belt and Road operations and encourage SMEs to bid on Belt and Road projects.
Embarking on Belt and Road projects is unlikely to be easy for SMEs considering the credit and operational risks – but the rewards could prove fruitful. With around USD740 billion invested in Belt and Road projects in ASEAN6 and the region becoming China’s second-largest trading partner7 in 2018, a closer collaboration between SMEs and governments should ensure more equal participation in this mega-initiative. Afterall, with
ASEAN falling specifically on Belt and Road’s designated route, the region stands to prosper as the initiative grows in the coming decades.
2 The Boston Consulting Group & China Development Research Foundation. 2018. The Belt and Road Initiative : An Inclusive and Symbiotic Approach to Shared Global Prosperity
3 Belt and Road Forum. 2019. Joint communique of the leaders' Roundtable of the 2nd Belt and Road forum for international cooperation
6 CIMB ASEAN Research Institute. 2018. China’s Belt and Road Initiative and Southeast Asia
7 Xinhua. July 23, 2019. China-Asean trade continues to boom amid global growth slowdown, uncertainties