The Belt and Road in Bangladesh
Bangladesh has the potential to play a prominent role in the flow of goods and capital westwards from China, with local businesses benefiting from its deeper integration into regional trade and investment flows as BRI-related projects come to fruition.
Since Xi Jinping’s landmark visit to Bangladesh in 2016, China’s involvement in Bangladeshi infrastructure projects has accelerated. During Xi’s visit, the two countries signed deals worth USD21.5 billion across a range of transport and power-related projects. To date, pledged BRI-related investment in Bangladesh stands at USD38 billion, or 15 per cent of its 2017 GDP.
A power boost
The principal benefit to Bangladesh in the short to medium term lies in the upgrading of infrastructure, the benefits of which stand to accrue to the whole country. Power supplies are a big part of this: by 2016, 78 per cent of Bangladesh’s 163 million people had access to electricity, with outages common. In part under the aegis of the BRI, Bangladesh has embarked on a programme to boost its generating capacity to 24,000MW by 2022, from around 16,000MW currently.
Keystone projects include a USD1.65 billion power plant near the port of Payra, a joint venture between the China National Machinery Import and Export Corporation (CMC) and Bangladesh’s North-West Power Generation Co (NWPGC), which is set to be operational by the end of 2019. This follows a NWPGC project for which Sinosure, a Chinese export credit agency teamed up for the first time with its German counterpart Euler Hermes and the World Bank Multilateral Investment Guarantee Agency to back the financing of a power plant in Sirajgang, which is now in commercial operation. Guangdong Power and Hubei Electric Engineering are also building plants in Shahjibazar and Chapai Nawabganj respectively.
Meanwhile, investments in transport infrastructure stand to give much needed relief to Bangladesh’s garment export sector, a backbone of the economy that is targeted to account for 80 per cent of the government’s USD37.5 billion export goal in 2017-18.
“Though Bangladesh is one of the most attractive offshore destinations for garment makers, there are infrastructure constraints,” says Saurav Anand, Standard Chartered Economist for South Asia. “The costs of exports from Bangladesh currently are among the highest in the world owing to infrastructure issues, leading to the high costs of transport logistics.”
A number of schemes stand to address these issues. A USD3 billion project to bridge the Padma river south of Dhaka, launched in 2014 and due to open later this year, will help ease pressure on the country’s main seaport at Chittagong by opening the route to the second largest port of Mongla to the south-west of the capital. The core structure is funded by the Bangladesh government and being built by China Major Bridge Engineering Company.
Meanwhile the accompanying rail link that will go over the Padma bridge and cut the travel time from Dhaka to the southern city of Khulna from nine hours to three, is being financed by a USD3 billion loan from China's Exim Bank. Another key BRI rail project, a USD4.4 billion line from Dhaka to Jessore, is being built by China Railway Construction and is expected to open in 2022. “Such projects will definitely improve competitiveness,” Anand says.
Ultimately the development of the BRI will open up growth of trade and economic activities, says Enamul Huque, Managing Director and Head of Global Banking for Standard Chartered in Bangladesh. “This initiative is fostering government-to-governments projects and collaboration, channelling investment into the vital power and infrastructure sectors including ports and road connectivity, and is driving up foreign investment. We also see the trend of rising imports by the Chinese entities of international retailers; that will be a significant growth area for Bangladesh textile exports.” A bilateral Bangladesh-China FTA, for which negotiations are ongoing, could also play a crucial role, Huque says.
A new FDI model
The long-term goal is to make Bangladesh more attractive as a destination for foreign investment both to take advantage of its export-oriented garment sector and serve the large and young domestic population. Part of this will be achieved through Special Economic Zones (SEZs), building on the success the country has seen to date with a limited number of export processing zones. One of the earliest, the Korea Export Processing Zone near Chittagong, was established in 1996. The Korean sponsor, Youngone Corporation, alone exported USD200 million worth of goods in 2017, and having already earned USD100million earned in the first four months of 2018, hopes to close the year at USD220million.
It is a success story the government wants to recreate: it now has ambitious plans to set up 100 SEZs by 2030, each with similar business-friendly provisions. So far some 55 government-owned and 11 private SEZ sites have been identified. Chinese companies are among those developing industrial parks near key infrastructure hubs, to be used by Chinese manufacturing firms. One, a 750-acre site near Chittagong, will be 70 per cent owned by China Harbour Engineering Company in a joint venture being formed for the park with the Bangladesh Special Economic Zone Authority.
While it is still early days, the net effect of better infrastructure and advantageous regulations within the new SEZs should lead to more FDI from South Korea, Japan and India as well as China. “There will be a lot more focus and positivity around SEZs,” says Huque. “As of today it’s at a nascent stage but the government is trying to push Korean, Japanese and Indian SEZs. It’s not just a China story.”
As each aspect of the trade corridor gets built out, the benefits of greater inward investment in Bangladesh should accrue to domestic firms just as much as Chinese investors. “The ecosystem definitely stands to benefit from subcontracting and local sourcing,” says Abhay Rangnekar, Managing Director and Head, Project & Export Finance, for Standard Chartered.
Steve Cranwell, Standard Chartered Head of Commercial Real Estate, points to examples of how BRI investment will impact local economies in South-East Asia being applicable in South Asia too. “As you build out rail networks, the proposition around those extends beyond residential property into commercial and retail at the same time. This opens up opportunities for indigenous companies to capitalise on these opportunities.”
A working example of the opportunities from BRI rail networks is the China Europe Railway Express which covers more than 60 cities in China, Central Asia, the Middle East and Europe, creating opportunities for the transport and manufacturing companies along the rail line as countries work together to create frictionless trade route from East to West. Poland has credited the rail link as a providing a crucial contribution to its new economic roadmap, called the Morawiecki Plan after the country’s Premier.
A stake in Bangladesh’s future
“China has traditionally demonstrated a three-stage approach to involvement in foreign investment,” explains Rangnekar, in which they start as Engineering Procurement & Construction (EPC) contractors, thereafter invest small equity stakes and finally seek major equity stakes.
In Bangladesh too, the participation of Chinese institutions in BRI ventures commenced principally in an engineering, procurement and construction (EPC) role, or as suppliers of capital machinery. Having developed a strong familiarity, they are now seeking significant investments in sectors such as power, roads and the like,” Rangnekar says.
There are signs this is changing. The examples of Chinese banks and industry players taking a larger role in Bangladesh’s future, from taking equity stakes through JVs for new power plants and industrial parks to broader financing for crucial transport projects, are getting more numerous. And it’s not just infrastructure. Chinese companies are broadening their investment horizons, says Huque.
“A recent example of major direct equity investment is the acquisition of a 25% stake in the Dhaka Stock Exchange by the bourses in Shanghai and Shenzhen.” Signed in May 2018, the transaction is valued at USD111.65 million and will see the Chinese exchanges help the Bangladesh bourse set up an enterprise board for small and medium-sized companies and launch more derivatives.
There is also more evidence of Chinese private firms being enticed by the prospect of servicing Bangladesh’s consumers in an economy growing at 7 per cent per year. Ant Financial, China’s dominant e-payments group, recently invested in Bangladesh’s bKash mobile payments service.
More such investments may well be forthcoming, particularly if Bangladesh seizes the full potential of its position as a crucial link in the BRI chain.