Bridging the gap
|President Xi Jinping with German Vice-Chancellor Sigmar Gabriel (left) and Hannelore Kraft, the state premier of North-Rhine Westphalia, in front of a map showing the route of the Yuxinou Railway in March last year. The new railway allows goods from China to be transported through Central Asia to reach Europe in just 15 days. (AFP)|
Today, the iron Silk Road, as it is called, is reducing the time and cost it takes to transport goods. It is still a linchpin of trade between the East and West.
Every year, millions of laptops made in western China are transported on the Yuxinou Railway through the rough terrains of Central Asia to Europe in just 15 days, saving two-thirds of the time needed for ocean freight.
This was made feasible with the launch of the 11,870-kilometer new Eurasian Land Bridge in 2011 — one of the landmark transnational projects to boost connectivity in Central Asia, which lies at the crossroads between Asia and Europe.
Efforts to upgrade infrastructure in Central Asia have borne fruit in recent years. Small and massive infrastructure projects have sprouted like mushrooms, from small-scale waterworks to mega projects such as the construction of roads and railways.
The numbers speak for themselves.
The Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 10 countries and six multilateral agencies — including the Asian Development Bank (ADB), the World Bank and the United Nations Development Programme — collectively promoting regional development and cooperation.
CAREC’s investment in the region has grown from six to 157 projects in less than 15 years. By the end of 2014, it had invested in transport, energy and trade facilitation projects, totaling $24.6 billion, a tenfold increase from 2001.
Until 2020, some $38.8 billion worth of investment will be channeled into the development of six multimodal transport corridors measuring 30,000 km in length — or three-fourths the Earth’s circumference.
“This network connects markets in China with Azerbaijan through Kazakhstan, providing access to Europe, and stretches from northern Kazakhstan to Pakistan’s seaports in the South,” says Zhang Wencai, vice-president (Operations 1) of the ADB, where he is responsible for operations in South Asia as well as Central and West Asia.
Considered a milestone is the recent opening of the Uzen-Bereket-Gorgan railway, which provides a shortcut between Central Asia and the Persian Gulf.
The 900-km railway connects cities in Kazakhstan, Turkmenistan and Iran, and will ultimately become part of a north-south corridor that stretches from the coast of the Baltic Sea to the Gulf.
Launched in December 2014, the new line is expected to spur a shift from truck to rail by linking major terminals in the region.
“This railway will be our gate to the Middle East,” said Nursultan Nazarbayev, speaking at the annual Astana Economic Forum held in the Kazakh capital in late May.
The Kazakh president has given an optimistic forecast: Grain deliveries from Kazakhstan to Iran will surge fivefold, thanks to the new line, and freight volumes will reach 10 million tons this year.
Yet none of these would be possible without tremendous investment in physical infrastructure. Building the Uzen-Bereket-Gorgan railway alone cost a hefty sum of $1.4 billion.
Asia as a whole will require some $8 trillion to fund infrastructure development from 2010 to 2020. Investment needs in Central Asia exceed $21 billion, according to ADB estimates.
Resource-rich Kazakhstan is among the key players to close that infrastructure gap.
From airport expansion to building a logistics center at the border, the world’s largest landlocked economy is in a quest to strengthen its position as a transit hub between the East and West.
According to the United Nations Conference on Trade and Development, trade volume among major markets of the Eurasian continent will reach $1.2 trillion by 2020, up from $800 billion last year.
A bulk of it comes from the burgeoning trade between China and the European Union, with trade volume expected to rise from $615 billion to $800 billion in the same period.
“While 98 percent of trade is delivered by sea, it creates huge opportunities to shift part of this trade flow to inland routes,” says Askar Mamin, president of state-owned railway company Kazakhstan Temir Zholy.
Kazakhstan’s involvement in an 8,000-km highway project known as the Western Europe-Western China International Transit Corridor is an example of an effort to capitalize on this trend.
The transcontinental corridor via Kazakhstan will enable Chinese goods to reach Europe in 15 days, three times faster than the conventional sea route through the Suez Canal.
The Kazakh segment of the corridor — some 3,000 km and with a handling capacity of 30 million tons of cargo every year — is due to finish by the end of this year.
However, the recent economic slowdown in Central Asia has been hampering efforts to rebuild much of the region’s decaying infrastructure built by the former Soviet Union.
According to the World Bank’s Logistics Performance Index in 2014, most Central Asia and South Caucasus (Armenia, Azerbaijan, Georgia) economies still lag behind in logistics and infrastructure development, with rankings below 100 out of 160 countries. Tajikistan and Kyrgyzstan rank at the bottom at 140 and 149, respectively. Kazakhstan ranks 88, compared to China at 28.
A fluctuating rouble and plunging oil prices have adversely affected national revenue and created economic hardships for resource-rich countries in the region.
Central Asia will slow to the weakest pace in five years with average GDP growth of only 3.5 percent this year, according to ADB. Kazakhstan will decline to 1.9 percent, down from 7.5 percent in 2011.
An alternative boost comes from China.
In recent years, Chinese coffers have increasingly funded infrastructure development in countries along the Silk Road Economic Belt.
Unveiled by Chinese President Xi Jinping in 2013, the One Belt, One Road Initiative consists of various funding mechanisms and a slew of projects to boost regional connectivity.
The overland Silk Road, reminiscent of the centuries-old trade route, connects China and Europe through Central Asia; the maritime Silk route provides links between South China, South Asia, Southeast Asia, Middle East and Africa.
“The Silk Road project — comprised of more than 60 countries and half of the world’s population — has the ingredients of a mega project in the modern era,” says Maksat Mukhanov, chairman of the Economic Research Institute in Kazakhstan, a state-funded think tank.
“It is highly relevant as the center of the world’s economic gravity is shifting to Asia.”
For instance, the China-led Asian Infrastructure Investment Bank (AIIB) established with a capital input of $100 billion is expected to provide a new funding avenue for the region’s infrastructure.
Another notable move is Chinese involvement in a hydropower project, the first investment from the $40-billion Silk Road Fund founded in Beijing last year to finance infrastructure development.
The $1.65-billion Karot Hydropower Project includes plans to build transport and energy infrastructure linking the deep-sea Gwadar Port in southwestern Pakistan to the Xinjiang Uygur autonomous region in northwestern China.
Wang Yanzhi, general manager of the Silk Road Fund, says his organization is keen to explore opportunities in the region, particularly in Kazakhstan.
“As Kazakhstan is now at a critical period of development with industrialization accelerated, many infrastructure projects are underway with high demand for capital, co-financing and loan extensions,” he says, adding that several projects in the country’s mining and manufacturing sectors are now being considered.
“Projects should be bankable with a reasonable return. This is our first priority,” Wang says.
But ADB’s Zhang says there is much more to regional cooperation and integration than just physical infrastructure. “The so-called ‘soft’ side is also critical,” he adds.
Zhang Chenghui, director of the finance institute at the Development Research Center of the State Council, highlights the need, for instance, for more flights to boost soft infrastructure. She illustrates this by saying she has had difficulty booking a direct flight from Beijing to Astana.
“There is only one direct flight between the two capitals every few days, which normally takes you five to six hours. If you miss it, you’ll have to fly over 20 hours with one stopover or more,” laments Zhang.
Ekaterina Miroshnik, director for infrastructure in Russia and Central Asia with the European Bank for Reconstruction and Development, says: “Investment alone is not a sufficient condition for sustainable transportation and logistics.”
The biggest obstacles to trade and transport have often been procedural or customs-related. Citing a research by the Organisation for Economic Co-operation and Development, Miroshnik says 50 percent of time is lost at the borders for trade between the Far East and Europe.
ADB’s Zhang says the regional development lender is increasingly shifting attention to harmonizing standards and improving the investment climate to facilitate trade.
After all, infrastructure development is more than just a race of how many kilometers of railways and new airports are being built. Alongside intensive hardware buildout, software upgrade plays an indispensible part in that boom.