Best Practice & Negotiating Issues When Handling China’s Belt & Road Initiative Projects

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Op/Ed by Chris Devonshire-Ellis

Policies to adopt when investing in BRI projects

The Asia Society Policy Institute have just released a white paper entitled “Navigating The Belt & Road Initiative” written by Daniel Russel and Blake Burger. In it, they make twelve recommendations as concerns the preparations needed to negotiate projects as part of the Belt & Road Initiative. These comments are geared to both public and private officers when looking at engaging in projects with China’s Belt & Road and contain valuable advise.

I have listed each of the 12 headings with my own comments along with those of the authors underneath as follows:

Require and conduct a rigorous, comprehensive, and transparent project preparation process. 
This in fact should be already in place at the tender stage. EU tenders for example are extremely rigorous, and China has been involved in several of these as Belt & Road projects. However, as the paper points out, this preparation has not always been as good as it should be. The problems with the Malaysian rail project came as Malaysian officials had calculated costs using out of date currency exchange figures. It is the participating Governments responsibility to ensure its supporting staff when negotiating such contracts are competent.

Establish a BRI project preparation fund. 
This is an internal suggestion and aims to ensure that all aspects of the financing and risks have been properly understood. In fact the better term would be “budget” rather than “fund”. As the paper says, “The use of public money through government-backed insurance or Chinese development bank financing, which provides implicit or explicit government guarantee, has created a moral hazard in which “easy money” leads Chinese developers to take outsize risks or pursue unprofitable projects.”  Understanding exactly where and under what terms financing is being committed is key – but requires a definable budget to analyze.

Develop a BRI FIDIC-based “standard contract” with required, recommended, and optional provisions.
This refers to recommendations that project contracts are prepared under the guidelines of FIDIC – the International Federation of Consulting Engineers. (www.fidic.org) If you haven’t got a FIDIC qualified person on your team – bring one in.

Use blended finance to ensure that BRI projects are commercially viable and can attract International Private & Public Finance 
This is a sensible proposal that calls on local stakeholders to have a say. The report finds that a common feature of the BRI projects they examined was the failure of project developers to adequately engage local stakeholders, civil society organizations, and communities to inform, consult, solicit input, or address their grievances. The Chinese approach heavily favors national government-to-government deals for the BRI. But dealing with a country’s power holders, particularly in systems with weak governance, is not a substitute for dealing with the local stakeholders and affected populations.

Ensure an open and transparent project procurement process. 
As the report states, host countries and foreign contractors frequently have difficulty bidding on BRI-related contracts for a variety of reasons. Language can be a problem, as can equipment compatibility and quality control. But many, if not most, project contracts are not competitively bid and may go either to other Chinese companies or to host country cronies with political connections. Established governmental or industry bidding procedures, even those used domestically in China, do not seem to be widely employed in BRI projects. The lack of an open, transparent, and inclusive procurement process generates corruption and waste through inflated prices and bribes. Heavy reliance on Chinese vendors and subcontractors also breeds resentment among the local population. One expert in Malaysia lamented in a meeting, “They even bring their own boards and nails!”  Conversely, to guard against the aforementioned challenges, the Myanmar government selected a respected Singaporean consulting firm to assist in bid evaluation and contract awarding for the Kyaukpyu port project. The evaluation was done in cooperation with a consortium of respected international firms and employed a scorecard system that screened for proven expertise and reliability. The message: don’t be afraid to use external advisors and consultants.

Conduct rigorous, transparent, community-engaged, and publicly available environmental and social impact assessments. 
Environmental and Social Impact Assessments (ESIA) should be carried out. A rigorous, transparent, community-engaged, and publicly available ESIA would provide a key tool for BRI project managers and host government agencies to develop procedures to mitigate or avoid adverse environmental and social impacts during the project’s life cycle. A good ESIA leads to better outcomes, reduced risk, and benefits to both host countries and China. Having a reliable and comprehensive ESIA would provide project developers and local stakeholders the capacity and capability to avoid environmental and social “time bombs” that could result in protests, project delays, or cancellations.

Require and enable stakeholder engagement throughout the project life cycle including establishing a local grievance mechanism. 
China doesn’t generally like to be questioned, but in foreign countries they need to respect local issues. That means putting into place a suitable mechanism to listen to objections and advise.  By providing an accessible mechanism for feedback from local stakeholders and impacted communities, BRI developers would have an early warning system to detect emerging problems. This would generate useful information, insights, and contacts that can be valuable.

Better regulate the use of Chinese workers in overseas projects. 
Many countries already engage strict labor laws and have minimum wage requirements that already negate the need to employ Chinese contractors. But others don’t, while in many, the disciplined and trained Chinese workforce are a needed commodity to execute the project. However, the  arrival of a large number of Chinese or foreign workers in BRI project countries has created resentment among local populations. The influx of Chinese (or third-country) workers can cause damage to the local environment, divert scarce or valued resources, or create social ills such as human trafficking. Labor rights safeguards for both imported and host country workers, along with accessible and effective mechanisms to address their grievances, could help prevent abuses that might result in strikes, protests, or disruptions that impede projects and exacerbate tensions. Better managing Chinese overseas labor issues will also help improve the reputation and international acceptance of BRI.

Expand and improve the use of local labor and businesses, including through “up-skilling” programs.
Its a good idea to use the availability of Chinese workers to train your own workforce. Increased local employment generates community buy-in for projects, which, in turn, reduces problems and risks, thereby enhancing long-term sustainability and operations. Expanding or developing technical and managerial training programs in the early stages of a BRI project would help ensure a flow of qualified candidates, addressing widespread complaints that BRI projects rely excessively on imported Chinese labor and offer only low-level service positions to local workers. Such training programs facilitate the spillover of technical know-how to BRI host countries, reduce the number of Chinese workers, create better integration with locally employed staff, ameliorate community resentment, and promote trust and goodwill. Reducing the size of the imported Chinese labor pool could reduce costs and the political or social problems associated with large overseas Chinese enclaves. In bolstering the use of local materials and products, project contracts should establish local content requirements. Incorporating more local workers into the project will help mitigate host  country backlash, promote economic development, and address widespread complaints about BRI projects.

Adopt “Clean BRI” anticorruption/antibribery oversight, enforcement, and reporting mechanisms. 
Corruption is a leading factor in excessive project costs, delays, ultimate project value, and project failure, producing suboptimal resource allocation. Addressing corruption would improve the efficiency and sustainability of the projects by ensuring that public money and contracts are allocated in a transparent and market-based manner. This, in turn, would help mitigate fiscal risks to the project host countries and to China. A Clean BRI platform would facilitate the participation of international companies and institutions. Fostering a level playing field for interested parties to compete increases the opportunities and lowers the risks in participation. Furthermore, these measures would enhance transparency throughout BRI projects and help mitigate local and international concerns.

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Create BRI units in Chinese embassies in project countries. 
This is an issue for the Chinese to implement, and a great suggestion, and is something the Chinese diplomatic corp would be well advised to consider.  Creating BRI units would address the criticism that Chinese developers operate in an uncoordinated and sometimes problematic manner without the knowledge of the embassy and without local expertise. Embassies could provide valuable country-specific political, economic, commercial, and social information to project managers and enhance oversight of Chinese developers’ compliance with international, local, or Chinese guidelines to help prevent some of the problems that plague BRI projects. An embassy team could play a constructive role in enhancing discipline among Chinese companies, contractors, and workers operating overseas, for example, by discouraging corruption, trafficking, or other problematic practices. These teams could also be an important resource for dispatched Chinese workers, who are often sent to isolated project sites where their passports are confiscated and lack any other avenue to obtain assistance. The units could help ensure that disputes are appropriately addressed, advise and assist Chinese firms with local laws and procedures, and help coordinate with local government and civil society organizations, thereby improving the prospects of project success. These units could facilitate Chinese embassy participation in local donor coordination groups that share information and coordinate in-country development priorities and activities.

Develop a searchable, comprehensive, up-to-date, English-language   BRI project database.
The report suggests that the Chinese authorities should create a comprehensive online BRI project database in English and, potentially, other languages (in addition to Chinese). The database should include a list of completed, on-going, and prospective BRI projects. The database should be searchable and kept current. It should include the most information possible on project financing, design, and execution. It should identify the entities involved, the scope and terms of the project, actual and projected numbers of laborers, and other salient information. Project-related documents should be posted and kept up to date. These might include contracts (with proprietary information redacted), ESIA reports, project timelines, procurement and bidding information, points of contact, among other key documents.

While this idea has its merits, it is also true that many BRI projects are conducted in languages other than English, and Chinese as well as Arabic, Russian and many others are the lingua franca rather than English. There is also, as an aside, the issue of language preferences in contracts, for which legal advise should be taken.

However, although I feel the issue may be impractical, the report does state the benefits, in that providing a database, this would address a major criticism of BRI: the lack of information concerning projects and confusion over which projects are part of the BRI. Posting up-to-date project-related details and documents would give international companies and financing institutions easier access to information, thereby opening up opportunities to take part in BRI projects and potentially raising the quality and sustainability of BRI projects. A database would allow research institutions to analyze and report on the BRI and provide information useful to governments seeking to develop infrastructure or promote new projects that might connect with the BRI. The transparency afforded by such a database would further bolster international trust as well as understanding and the reputation of BRI.

The complete Asia Society guide, “Navigating The Belt & Road Initiative” can be downloaded here and I recommend it as a template for both Governments and Businesses to use when looking at projects and contracts along the Belt & Road or any other cross-border finance project.

At my firm, we have over 27 years of dealing with Chinese businesses and have been involved in a great number of Joint Ventures and similar legal structures. Belt & Road projects are essentially Joint Ventures, and I recall giving advise years ago when dealing with these. I used to call it “The Six Ds” – Due Diligence, Due Diligence, Due Diligence. It remains as true today as it was then. The only difference is that BRI projects by definition are cross border and combine different sets of sovereign legal protocols, in addition to China JV similarities in that cultural as well as legal misunderstandings and a lack of Chinese business know-how can be damaging. This is especially true right at the front end of negotiating contracts with the Chinese.

As can be seen, there is a great deal of advice that can be brought in to advise on Belt & Road projects, and it helps to have consultants on board that are familiar with Chinese business practices. Although a BRI project may be in a different country, the Chinese will follow what they are used to; and these standards and protocols are always migrated overseas. These may just be administrative quirks, or they can, to the unwary Government procurement or contractual overseer contain issues that can legal or financially damage the expectations of the project to the host country disadvantage. This risk can run into the millions of dollars when large contracts are involved.

The key take away from these best practices is as follows: bring in external consultants, and never assume you are familiar with the deal if you have no or limited China business experience. It is better to be safe, than sorry.

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Silk Road Briefing is produced by Dezan Shira & Associates. The firm provides business intelligence, legal advisory, tax advisory and on-going legal, financial and business operational support to investors throughout China, India, ASEAN and Russia, and has 28 offices throughout the region. We also provide advice for Belt & Road project facilitation. To contact us please email silkroad@dezshira.com or visit us at www.dezshira.com

 

Related Reading:

Vassal States? Understanding China’s Belt and Road MoU


China’s Belt and Road, Questions over Concepts of Nationality and Sovereignty


Singapore, China Jointly Write Mediation Rules for Belt and Road Arbitration Courts

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