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Opportunities in Emerging Market China: Belt & Road’ PPP Advisory March 2016 March 2016

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Page 1: Opportunities in Emerging Market China: Belt & Road’ PPP · Opportunities in Emerging Market China: Belt & Road’ PPP. ... Silk Road . Maritime Silk Road . Quanzhou . ... Security

Opportunities in Emerging Market China: Belt & Road’ PPP

Advisory

March 2016

March 2016

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PwC March 2016

Belt & Road (B&R) – Priorities and Roadmap

2 Belt & Road: One Capital Market

Moscow Rotterdam

Duisburg Venice

Tehran Athens

Istanbul Samarkand

Bishkek Almaty Houergusoi

Lanzhou Xian’

Kolkata

Colombo Kuala Lumpur

Jakarta

Hanoi Beihai

Haikou

Guangzhou

Fuzhou

Zhangjhiang

Quangzhou Dushanbe

Silk Road

Maritime Silk Road

Quanzhou

Nairobi

Urumql

• Transport infrastructure building, investment and trade

• Interconnection of infrastructure along the routes

• Investment and trade facilitation

• Financial cooperation for better financing support for the construction work

• People-to-people exchanges

• Environment protection and social responsibility

• Increasing communication at multilateral, bilateral, regional and sub-regional levels

Priorities of the ‘Belt and Road’ initiatives

Source: Xinhua

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PwC March 2016

There are 65 countries involved along the B&R routes

3 Belt & Road: One Capital Market

Middle East and Europe (16 countries) Key countries include • Poland • Romania • Czech Republic • Bulgaria • Lithuania • Slovenia • Switzerland

Commonwealth of Independent States (11 countries) Key countries include • Kazakhstan • Uzbekistan • Ukraine • Kyrgyzstan

Russia

Mongolia

China

Southeast Asia (11 countries) Key countries include • Indonesia • Thailand • Malaysia • Vietnam • Singapore

South Asia (8 countries) Key countries include • India • Pakistan • Bangladesh • Nepal

West Asia and North Africa (16 countries) Key countries include • Saudi Arabia • United Arab Emirates • Egypt • Iran • Turkey • Israel

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PwC March 2016

Belt and Road will stimulate a massive, trillion dollar market, much larger than China’s domestic one

4 Belt & Road: One Capital Market

USD($) 5 trillion

Total investment need in the covered area in transport infrastructure for the coming 5 years (excl. power, water, and other infrastructure)

USD($) 2.5 trillion

Planned domestic B&R projects already announced by Chinese provinces

USD($) 100 billion

Total annual investment need in infrastructure in developing countries

• Currently: USD 0.8-0.9 trillion (3-4% of GDP)

• By 2020: USD 1.8 – 2.3 trillion (6-8% of GDP)

• Key priorities: ‒ Power (Electricity) ‒ Transport ‒ Telecommunications ‒ Water

• Prio

Total infrastructure demand for Southeast Asia in the next 10 years

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PwC March 2016

Such a vast project as B&R creates an enormous need for funding

5 Belt & Road: One Capital Market

USD($) >20 trillion

Total expected financing associated with the Belt and Road initiative

Infrastructure financing With total infrastructure spending across developing countries, on average: • 50% comes from National budget

• Ca. 20% comes from National

development Banks

• 25% comes from the private sector

• 3-4% comes from Multilateral Development Banks

• 1-2% comes from South-South flows

Source: Bhattarchayia and Romani (2013)

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PwC March 2016

Available capital through institutions is massive, though not exclusive nor sufficient

Belt& Road

Silk Road Fund

AIIB

CDB, EXIM Bank,

ADBC

6 Belt & Road: One Capital Market

(USD 100 billion)

(USD 40 billion)

(USD 50 billion)

(<USD 100 billion)

BRICS New Development Bank

Indicative

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PwC March 2016

Example: The Philippines (1/3)

7 Belt & Road: One Capital Market

The Philippines’ economy has grown very strongly in recent years and infrastructure spending needs to respond to the growth in the economy to support further growth. Spending in infrastructure is expected to grow at around 10% a year in the next decade, reaching a total of $27 bn a year by 2025.

Infrastructure in global context

Infrastructure spending as a % of Asia Pacific, LHS

Infrastructure spending as a % of world, RHS

Forecast 0.6%

0.5%

0.4%

0.3%

0.2%

0.1%

0.0%

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00% 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Philippines versus peers

Forecast Philippines 180

160

140

120

100

80

60

40

20

0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

Total infrastructure spending per year, $bn

Growth is expected to be focused on manufacturing, transportation and communications, and social infrastructure. The expansion in the chemicals and basic metals sectors is likely to lead to significant growth in the manufacturing sector throughout 2025.

Forecast 14

12

10 20

8

6

4

2

0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

$bn per year, current prices $bn per year, current prices

Fuels Basic metals Chemicals

30

25

15

10

5

0 2005 2015 2025

Malaysia Thailand Indonesia

Source: Oxford Economics Source: Oxford Economics

Source: Oxford Economics Source: Oxford Economics

Social Transport and comms Manufacturing Other utility Power Extraction

Infrastructure spending by broad sector Manufacturing infrastructure investment

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PwC March 2016

PROJECT Sector Project Cost

(USD) Indicative

Roll-out

1 Bulacan Bulk Water Supply Water 542.22 M Advertisement published last June 20

2 ITS-South Terminal Transport 115.56 M Jul-14

3 New Centennial Water Supply Source Water 417.33 M Aug-14

4 O&M of LRT Line 2 Transport No CAPEX Aug-14

5 Laguna Lakeshore Expressway Dike Road network 2.73 B Aug-14

6 Enhanced O&M of Bohol (Panglao) Airport Transport 52 M Sep-14

7 O&M of Laguindingan Airport Transport 324.44 M Sep-14

8 Davao Sasa Port Transport 388.0 M Sep-14

9 O&M of Puerto Princesa Transport 71.11 M Sep-14

10 O&M of Davao Airport Transport 476.44 M Sep-14

11 O&M of Bacolod Airport Transport 208.89 M Sep-14

12 O&M of Iloilo Airport Transport 322.44 M Sep-14

13 Regional Prison Facilities through PPP Security 895.33 M Sep-14

14 Motor Vehicle Inspection System Transport 313.11 M Sep-14

15 San Fernando Airport Transport TBD Oct-14

16 LRT Line 1 Dasmariñas Extension Transport TBD Nov-14

17 North-South Commuter Railway Transport 6.03 B Nov-14

18 Mass Transit System Loop Transport 3.0 B Dec-14

19 Manila Bay-Pasig River-Laguna Lake Ferry System Transport TBD Jan-15

20 Batangas-Manila Natural Gas Pipeline Energy TBD Jan-15

Example: The Philippines (2/3) Investment Opportunities – Projects to be rolled out by Jun 2015 (as of September 2014)

8 Belt & Road: One Capital Market

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Development and O&M of a national network of Motor Vehicle Inspection Centers using inspection methods that will be linked to the information system of the Land Transportation Office (LTO).

By 2035, the motor vehicle population in the country is estimated to reach almost 35 million

Implementing Agency

DOTC-LTO

Estimated Project Cost

USD 313.11 M

Cooperation Period

TBD

Status

Feasibility Study nearing completion

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Institutional Arrangement • Contracting Parties/ Implementing Agencies

• National Line Agencies • Government Corporations • Local Government Units

• Review and Approving Bodies • Inter-Agency Investment Coordination

Committee (ICC) • NEDA Board

• Coordinating and Monitoring Agency • The Public-Private Partnership Center

• Other National Agencies Concerned • Policymaking Bodies • National and Sectoral Regulatory Bodies

PREQUALIFICATION, BIDS AND AWARDS COMMITTEE (PBAC)

• Responsible for all aspects of the pre- bidding and bidding process, including the preparation of tender documents, conduct and evaluation of bids, and interpretation of the rules regarding the bidding, among others

The PPP Program is identified as one of the strategies to accelerate infrastructure development and achieve inclusive growth.

10

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PwC March 2016

The wider opportunity picture Examples of second tier Asian Cities – Challenges = Opportunities

City Mayor Papers Key Issues

1 Bandung South East Jakarta Pop 2.4m (14k sqkm)

Attractions: Climate, Highlands Challenges: Water, Flood Control, Congestion Plan: Roads, transport hub

2 Semarang Central Java Pop 1.6m (5.5k sqkm)

Attractions: Agriculture, central market, heritage Challenges: 25% poverty, new business, funding Plan: Redevelop central market, urban renewal, PPP

3 Bogor South Jakarta Pop 1m+ (9k sqkm)

Attractions: World Heritage Botanic Gardens. Mountains, Tourism, MICE Challenges: Clean Water, Congestion, waste mgnt, transformation Plan: BRT, transport hub, city cable car, township; clean water, water recreation, SWM

4 Tengarang West Jakarta Pop 1.8m (10k sqkm)

Attractions: Location near Airport; Manufacturing, Business Parks, Logistics Challenges: Land Acquisition, Funding Plan: Social Infra, BRT, transport hub, SWM

5 Sidoarjo East Java Pop 1.9m (3k sqkm)

Attractions: Agriculture, Highlands Challenges: Water Supply, attracting new business, funding Plan: Umbulan water supply pipeline

11 Belt & Road: One Capital Market

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PwC March 2016

Political risk

• Geopolitics and territorial dispute. The geopolitics of the OBOR region is complicated; some areas suffer Territorial disputes even local wars; and there’s great uncertainty in policy and implementation

• Domestic political instability. Many countries along the OBOR have unsettled political conditions with frequent political parties’ rotations, which will impact policy and project implementation

• Religious extremism and terrorist threats. Religious relations in Eurasia are complicated, and religious extremism, terrorism, separatism and other activities remain rampant, threatening safety of the projects

Economic risk

• Big changes in market conditions. The current world economy is still unstable, and changes in macro-economy, industry and market environment will all have impacts on investment

• Different regulatory and cultural systems. Laws and regulations in the countries along the OBOR differ from one another, and regulatory systems in many developing countries remain incomplete, which, along with custom and cultural differences, tends to result in operational frictions

Operational risk

• Great uncertainty in project profitability. Infrastructure projects require large scale investments and high-standard management, and have long operating cycles and huge uncertainty on profits

12 Belt & Road: One Capital Market

Significant potential risks needs to be considered

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Thank you!

© 2016 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.