Why Can’t The G7 Build A Belt & Road? Because They Can’t Afford To

A lack of investment capital and a technical engineering gap is hindering the West’s competition with China 

Op/ed by Chris Devonshire-Ellis 

The G7’s announcement last week that they would work together to provide an infrastructure alternative to China’s Belt & Road Initiative, the ‘Build Back Better World’ Program, or “B3W” raised a great deal of media attention, especially when the figure of a US$40 trillion spend was announced. Our next-day analysis of the B3W however revealed the finance was expected to come from the private sector as opposed to government funding, a point subsequently followed by many mainstream outlets. Fortune Magazine has called the B3W ‘a paper tiger’. Others have also been somewhat incredulous about how G7 governments expect corporates to invest that sort of capital into ‘poor nations’. The upshot is a general understanding that while the B3W makes great political headlines, that sort of investment is just not going to materialize.

Already this year, in the period January-May, Chinese Overseas Direct Investment (ODI) into BRI infrastructure projects increased by 13.8% to reach an investment spend of just under US$1.5 billion in specific BRI projects overseas every month. The Chinese can raise this money as they have a booming economy and have spent the past twenty years developing their own infrastructure. This has helped fund new growth, create new revenue streams, and generate increased taxable fiscal income. There have been some inevitable white elephants along the way – Zhuhai City in south China and several others across the country never really needed such huge airports, and the Maglev proved far too expensive for anything more than short routes, but for every one of these mistakes, many other viable projects have worked.

One that springs to mind is the high-speed, high-altitude railway to Lhasa. Serious construction and engineering challenges had to be overcome not least the building of track over permafrost and engine functionalities at heights of over 3.5km above sea level. Yet these difficulties were resolved, construction beginning in 2001, with the route tested and operational by 2006. It has been in use ever since and the lessons learned put into use along other routes, including many BRI projects such as rail connecting through the Himalayas to Nepal and through the Karakorum to Pakistan and Tajikistan.

These engineering skills are now being complimented by new engine technologies and fuels, with much of this also being developed by China in solar electricity and batteries and by Russia, who also have an extensive electric and battery development industry but can bring an additional fuel to the party – plentiful supplies of gas. Russia is at the forefront of developing hydrogen, LNG, and bio-fuel powered locomotives. These will operate to replace diesel and where laying electric tracks is cost prohibitive.

There are additional advantages these countries have over the G7. Firstly, they tend to be very top-down led – decisions made by a group of individuals in power for the long haul. As I previously pointed out, many of these are engineers, now in positions of political power. The G7 in contrast is largely made up of career politicians. The contrast in professional capabilities is striking, building infrastructure being a long way from democratic political theory.

Secondly, and it may seem obvious, but land is cheap. Much of the required infrastructure build in Central Asia, South-East Asia, South Asia, the Middle East and Africa is over difficult terrain. That is not the case in the United States or much of the EU, where infrastructure needs to match those of the Belt & Road Initiative include expensive land acquisitions with owners demanding full compensation. Others do not wish to sell at all. Local communities are actively against change. That isn’t an issue in the Thar Desert, Hindu Kush, Gobi, or Siberia. If there is – then people are resettled.

Then there are the operational costs. Basic level construction engineers in the United States attract annual salaries of US$60-80,000 and in Germany, about €60,000. In China, about US$15,000 and in countries such as Pakistan and parts of Africa about US$2-4,000. This adds a significant cost burden to the construction costs, but also the costs of locally sourced component parts, such as steel, concrete, and other materials. In the G7 the cost comparisons to China for infrastructure development are multiplied several times over for a similar project.

The impact of this is now showing. According to IbisWorld, US rail freight industry revenue declined 5% in 2020 amid Covid, as rail freight transport and travel plummet and construction projects are temporarily halted. As demand from rail transportation declined in 2020, new projects are expected to be delayed amid the economic uncertainty. As the freight transportation index and overall trade activity falls in 2020, industry revenue is expected to be hindered.

This is in direct contrast to Russia and China where Russian trans-continental rail freight doubled in 2020 and European freight operators are reporting a doubling again of China-EU freight in 2021.

This means then that the ability for the G7 to actively compete with China is highly problematic. Firstly, they have allowed their own infrastructure to diminish. For example, the United States still (just ahead of China) has the world’s longest railway system (Russia is third). Yet its usage of that in terms of carrying freight is just tenth globally in terms of volume. It is underutilized, in need of serious expenditure and hampered by deficiencies in technical innovation and sheer land expense. It is a similar issue within the EU. They do not have the engineering capability and cannot afford to re-purpose land for much needed route development. This is one reason why China is involved in projects in Eastern Europe – where more authoritarian governments will relocate people and where land is cheaper. The Hungary, Montenegro, and Serbian rail project is a BRI project, although it will undoubtably benefit EU nations such as Italy as well (one reason Italy joined the BRI).

In a nutshell then, the simple reasons the G7 cannot compete with the Belt and Road Initiative are as follows:

• They cannot raise the capital required
• They cannot afford land acquisition
• Operational costs are too high
• They are technically inferior in infrastructure engineering

Of these, the operational cost differential has long been recognized and could be absorbed under G7 Reshoring Jobs schemes. However, the inability to raise capital remains a serious defect without Governments insisting on it – and becoming more authoritarian or unpopular – such as by raising taxes.

Wealth creation through the current model of land and property acquisition is also starting to pinch when Government needs outstrip those of the populace.

The people now have power of veto and use it. Yet it is the final element that is generally both not typically considered – it is that China, and Russia are now both ahead in terms of engineering capabilities than the G7. Getting that basic knowledge and competitive technical know-how into place will take at least a generation. While the West aims to be ahead in the digital revolution, it has have disregarded the latest technologies required to pour concrete in sub-zero, aquatic and increasingly tropical environments needed to support it.

Related Reading

• Russia Explores Re-Development Of Its Trans-Polar Railway
• China-Europe Rail Freight Doubles In 2020. These Are The 44 Key And Emerging European Freight Hubs To Watch