Belt And Road Initiative And Aviation

Transcript

Andrew Herdman:So we have a diverse panel, and it'll be interesting to get some different perspectives. What are we talking about? The Belt and Road Initiative and aviation. Everybody's heard of the Belt and Road Initiative. It originally was called One Belt, One Road. You've all heard of that. Someone described this as the most well-known and least understood foreign policy initiative. So let's get the right foundation. The official title— it's catchier in Chinese, 一带一路. The official title is the Silk Road Economic Belt and the 21st Century Maritime Silk Road. And the key thing to understand is that the Belt is about ground transport from China across to Europe, focusing on railways, roads, ground transport infrastructure, and improving the flow of trade, and that's why the allusion is to the Silk Road because that was an overland route.

Suren Ratwatte:Traditionally.

Andrew Herdman:It's lost in translation, but the road part of the initiative has nothing to do with roads. It's about maritime routes. And traditionally, when maritime shipping in the 18th century, 19th century became the way the world was linked up, China was linked through a web of maritime routes across the opening of the Suez Canal and so on, and so that's well established. And then, of course, in the last 50, 60, 70 years, we've seen the flowering of aviation, which is the modern way of linking the world and linking Asia to the world and within Asia, and we've seen tremendous growth. So the reference to the Silk Road takes us back hundreds of years, and I think it's helpful to realize how the world has changed. Between about 1500 and 1800, Asia was the biggest economy on Earth. It was the biggest populations on Earth, as it is today, and roughly 50% of global GDP was Asia— China and India, largely. Once the Industrial Revolution took off in the middle of the 19th century, By 1870, the growth of Europe, the growth of United States had begun and Asia's share of global GDP fell from 50% to 30%. And by 1970, Asia's— China and India's share of global GDP was down to 10%. That was the low point. So in our lifetimes, in the last, what, 50 years, we've seen the resurgence of China, now followed by India, to the point where China and India is now about 25% of global GDP. But from their point of view, they're thinking back to the history where they were the dominant economic power and the dominant trading power, and so the Silk Road had a significance at that time. The Belt and Road Initiative, as it's now better known rather than One Belt, One Road, Touches 65 countries. They represent about 25% of China's foreign trade. It encompasses transport infrastructure of all modes, including aviation, which we're focusing on today, energy infrastructure, and soft infrastructure in terms of digital communications. To give you some idea of— this policy was first introduced by Xi Jinping, the President of China, 5 years ago. Last year, they had a big conference about this time last year in Beijing. There was a big conference which attracted delegates from 120 countries, 28 foreign heads of state, and 70 international organizations. It's very hard to put a finger on the actual magnitude of the investments, but we're talking tens, hundreds of billions of dollars. In terms of investment and in terms of capital financing. In terms of aviation, CAC published a report in 2015 which talked about ambitions within the Belt and Road Initiative, and in 2017, last year, China added 203 new air routes to countries within the Belt and Road list. At the same time, they added a lot of new routes to many other countries as well, so we have to see see this in the context of China growing. And I think the last thing to say in terms of introduction, if you haven't been to China recently, China in the last 20 years has introduced modern infrastructure— airports, roads, ports— and they have built— they've poured more concrete in that period than America did in 100 years, and they have some of the world's most modern infrastructure. They also have a lot of foreign reserves and capital, and in some sense, what we're seeing is the exporting of that expertise, saying, look, it worked for us, it can work for you too. But what we're talking about is the terms under which those relationships are done with different countries, and this whole thing is best seen as a China-centric initiative, and the deals are done bilaterally with other countries. So it'll be interesting to hear from perspective of individual projects. how it's perceived from outside by those countries and by other major groupings, Europe in particular, United States in particular, who have expressed some skepticism. So enough preamble. Barry, perhaps I can start with you. As I said, you've worked in aviation, you've seen— we've just heard about Africa and you have some experience of that, and a lot of the Belt and Road Initiative has focused quite a lot on reaching out to Africa, Chinese investment, and also you've also had logistics and interests as well from the transport point of view, not just air cargo but others. But give us your general thoughts on the Belt and Road Initiative with an aviation dimension.

Barry Parsons:Thanks, Andrew. I think you framed it well, like little understood, but everybody has a conversation, so there's spin and buzz and reality, and you've got to understand it is a policy, and what would have happened anyway without this policy is important. But I think, first thing is, who are the BRI states? Originally, it was 65 states, but pretty well anyone's welcome, as you talked about last year in Beijing, there was a significant conference, 120 states. So there's a, you know, you can separate them into, There's enthusiasts, there's active participants, like, say, Kazakhstan, very central to it. Then there's left-of-field states like Tonga, Madagascar, and even Panama, they're talking about BRI projects. And this is through the official state portal of the Chinese government, so pretty well anyone's welcome. And that gets to the core of what is the policy and what are the objectives of the policy. is, as you say, 5 years old. It's a, it's a One Belt One Road policy, as it was, but it's also got to be read in conjunction with the current 5-year plan, which is the 13th 5-year plan. And in there, there was plenty on aviation that aligned to that policy already. There was infrastructure development, particularly around airports. There was the additional international licensing of new airports that weren't previously licensed. There's a significant growth of the 3 major hubs in side of China. And there's also various other elements. There are pre-existing corridor policies, like between China and Pakistan, and Pakistan I'd call another enthusiast. There's also the proclamations, announcements, and actions of the CAC, particularly the administrator made that speech back then. So that's, you know, what is the policy? As I said, projection of state power, Chinese hegemony across the, you know, recovering past glories. There's even a view that the capital that's being invested is— it's a better— it's higher risk, but it's better to put it in there than in low-interest-bearing US securities where the foreign reserves are. So there's different views on that. So how is it happening? There's various state enablers, so there's the CAC, there's the There's banks, there's aircraft financiers like China Everbright, there's various state agencies, state-aligned agencies like the China-Africa Development Fund, for example, put about $500 million— they raised about $500 million for Ethiopian Airlines fleet expansion. That was pretty significant. Then there's China Southern, building a significant hub now in Urumqi out in western China. Flying into many of the core BRI states is important, but also connecting Southeast Asia. Implementation visibility— there actually is quite a lot of implementation visibility, and these are pretty long bows, some of them. There was a BRI project announced by the Chinese government in Madagascar last week, but then it ranges to airport construction in Georgia, a new airline startup in Georgia, MRO acquisition in Estonia. It's quite a range, and it gets back to who's a BRI state. Well, pretty well everyone is welcome to be a BRI state, because that's the objective of the policy. And then probably the last thing is the potential impacts on global aviation. So long-term change potentially to mid-hemisphere hub dynamics, and growth in Chinese airlines, because there's a lot happening inside of China that's complementary to what's happening outside of China, and also the Chinese aircraft manufacturers, they're probably going to come into play too. So that's the broad sort of context.

Andrew Herdman:Thanks. So when you unpack it, there's a lot to digest, and even collating all of this is hard work, and you've given a very good summary of that. Rupert, can I turn to you? I mentioned the history, so Hong Kong has been at the heart of that, began as a maritime trading port. You run an airline that was set up late '40s, I suppose, after the war, and has been at the forefront of the blossoming of Hong Kong, and in the last 20 years, of course, the rapid growth of China. And you're also— Hong Kong's the world's biggest air cargo hub, I think, as well as being a very dense passenger hub and linked into very busy routes. What's your perspective from a Hong Kong vantage point, and how do you see China given the way you're plugged into that?

Rupert Hogg:Sure. Well, I think you encapsulated the BRI, the Belt and Road Initiative, well, Andy. Yeah, I mean, you're right about Hong Kong too. If you look at the history of Hong Kong and Hong Kong's economy, it's always been a— I always call it a super-connected hub. Originally, that was, of course, maritime. It was for a long time the largest container port in the world, as you remember. It is the largest aviation hub in the world. The 3 big pillars of Hong Kong's economy— logistics, Finance and tourism also are all heavily reliant on Hong Kong being super-connected and punching above its weight. It is a unique place, I think, in terms of the skills and the experience that come together in Hong Kong. If you think of the Belt and Road initiatives, there's going to be very long lead time construction and infrastructure. investment. So you obviously need that expertise. You have to combine that with funding, long-term funding. There'll be a series of primary contracts and then secondary contracts. And you can see in Hong Kong people getting to understand where the initiatives are actually going to be executed and coming together to see what part Hong Kong and Hong Kong industry can, can play, if you like, in the whole Belt and Road Initiative. A lot of that's been coordinated and, and led by the Hong Kong Trade Development Council, actually, and so there's a series of formal meetings to allow that to happen and to allow people to get together to understand how it might work from one end to the other. The other point I'd make about it is that it is all about investment and and, uh, but that it's also about cultural interchanges and interfaces. And of course, as Seb just pointed out, you know, on the digital side, Kenya is a great example of how you— and China itself is a great example of how you can completely leapfrog all the stages of communications and connectivity with modern technology. So, you know, I think there is a really big opportunity. It's a long burn, And as has been pointed out already, you know, it's a very, very wide spectrum of countries involved and at different stages of development. So back to aviation, if you look at the, the road, if you like, going into Southeast Asia, well, from Hong Kong, that's, that's really quite linked already in the sense that we have 350 flights to Southeast Asia every, every week. And if, if we look at going west, we link up places like Kazakhstan. We co-share actually with Astana. And India is another good example where we have 30 freighters a week and 50 passenger flights. I think broadly speaking from an aviation point of view, and we all know this, when When you get to big passenger movements, there is the business-related travel, and then there is a strong correlation where you get exponential growth once disposable incomes have reached a certain level. Now, many of the places where the Belt and Road initiatives are focused, in order to build that sort of economic growth, you need to build the infrastructure first, and you can see that China's very focused on—

Andrew Herdman:Infrastructure.

Rupert Hogg:doing that, helping people do that. And when that's in place, then the economy becomes more sophisticated and people start to travel. And that's how we see the development in very broad terms, because it's such a broad sheet we're talking about.

Andrew Herdman:Interesting. Rafał, there's talk about— I mean, there's a railway network that now runs from China. You can put a piece of freight on a— in in China and it will turn up in Western Europe, even as far as the UK. To what extent is that going to be a competitive threat to the maritime business, which is a bit slower but cheaper, or to air cargo, which is quicker and obviously more expensive? How do you see the overland rail network supported by sophisticated ground logistics? How do you see that, and from your vantage point within Poland, In mainland Europe, looking both ways, how do you see it? And from an aviation perspective also.

Rafał Milczarski:I will answer short. It depends, but perhaps before I answer, I would like to share a certain perspective because I think what's important and what's the key to unlocking this whole concept is I think actually it's all about trade. And actually, trade has been throughout history the engine of growth. It's been the engine and the fuel of growth. If you look at Hong Kong, trade. If you look at Silk Road, all the cities along the Silk Road, they enjoyed phenomenal growth. You look at Europe, at Hanseatic cities, development because of trade, because of economic activity. And I guess, you know, the initiative, it has a very significant geopolitical perspective because with growth of China, I mean, when we look at the history of China from Western European perspective, we look at the last 300 years, but China is 5,000 years of history. And actually what was evident in the economic data that you actually Presented, they used to be the center of the universe, and they were more developed. They used to be more developed than us in the West. After the Second World War, you know the center of gravity of the world, you know very much in the North Atlantic. So, you know, quite clear. I think the center of gravity is now shifting, and it's shifting. It's definitely shifting eastwards, and it's shifting towards China. And of course, that creates tension. That tension is quite visible in the— well, there are various names to the sea. I don't want to be politically incorrect, but in the sea leading towards— on the main corridors, some people call it the South Chinese Sea, some people call it different names, but basically there are tensions there and this tension is basically because there is this shift in the center of gravity and actually the balance of power in the world is changing. And I think the Belt and Road Initiative is actually a way of perhaps changing the game. So you're asking me how it can influence, well, the aviation or the railways and actually I have to say I'm blessed to be expert in both because in my previous career as a private entrepreneur in the railway sector, I used to run Western Europe's normal gauge heaviest trains. Of course, incomparable by weight to the trains that are carried in Australia or America, But nonetheless, Europe's heavy strains, and I think fundamentally it all depends because I can easily you know it's quite a simple project imagine imagine a railway project within the Belt and Road Initiative that would actually change the balance of you know maritime versus land transportation completely because frankly speaking technologies are available in America you have double decker. container trains. You have very long trains, you know, between 5 and 10 kilometer trains. Now, if you imagine something like that and if you created infrastructure that would be sufficient to carry such trains, those trains can travel at 100 kilometers an hour or something like that. Basically, that shortens the distance, the time of delivery of the product, at least to Europe. In a fundamental way, phenomenal way, and Europe obviously is a very significant market. Now, whether that happens or doesn't happen, I don't know. I mean, it depends, as I said, because you cannot do, you cannot implement such a project on a bilateral basis. In order for such a project to be successful, you would have to create completely new isolated railway infrastructure Basically, a few parallel rail tracks with connections between them allowing for train passing and stuff like this, but I would say 4 or 5 rail tracks along the length of the whole distance would be completely sufficient with additional terminals along the way. And fundamentally, you then can have 10-kilometer trains with double-decker containers running very fast and delivering containers to Europe. That would be a phenomenal game changer, but that would require the cooperation between China, Kazakhstan, Russia, Belarus, and Poland, so, you know, 5 parties. Whether that happens, I don't know, because each one of those countries have their own separate economic interests. I think from the perspective of humanity, from the perspective of trade, from the perspective of, enriching the world, I think that would be a phenomenal idea. Whether that is in fact applied, I don't know, but I think it's such an obvious one, it's hitting us in the face, it certainly should be considered. On the aviation side, again, I mean, aviation is tricky because we have an asymmetry. Europe is single market, open market, Basically, we can, you know, any European carrier can fly anywhere, whereas China is much more restrictive in that sense, and it's connected with bilateral arrangements with various European countries. I think there is a certain asymmetry also in terms of transparency of processes. You know, basically, if the slots are available in Europe, they will be given to another carrier. Whether from Europe or from outside of Europe. Now, I think a lot of European and world carriers have difficulties obtaining slots at Chinese airports, and I don't think it is not possible to generate the capacity for those slots. I don't think the airports have run out of capacity, but that's, you know, for China's internal reasons. The way that they manage this is actually such that They have a legitimate claim that they cannot issue it, and that creates a disbalance. So I think for the Belt and Road to be actually successful, it has to be multilateral and not necessarily bilateral. If it really is supposed to change, if it's not supposed to be just a way of investing or creating a nice platform of PR, for various Chinese investments in various countries around the world. If it's really something that would have a systemic change for the future of world trade, I think that has to be multilateral and I think both parties have to understand that it has to be symmetrically open. So the Belt and Road can create very significant benefits for the Chinese economy and for the Chinese exporters, But at the same time, there has to be symmetry. So I think once that is understood, that will create huge economic growth, I believe.

Andrew Herdman:Good point, and a reminder that China is the factory to the world, but China is now a huge consumption, growing consumption and a market. So it's two-way flows and that raises the question of inward investment to serve the Chinese market, not just as airlines but other businesses. And we've seen the modernization of the logistics within China, the growth of the express sector and so on. Suren, let's talk about Sri Lanka. China invested in port development. You've had some airport developments. What's been your experience?

Suren Ratwatte:Good question. Now, I don't know how many of you have been to Colombo recently, but it's going through a bit of a construction boom and it's quite an interesting construction boom because it's mainly funded by Chinese banks. It's built using Chinese materials. It's built by Chinese construction workers.

Andrew Herdman:In Sri Lanka?

Suren Ratwatte:In Sri Lanka. There are thousands of Chinese construction workers in Sri Lanka working on all these projects. I do believe the ultimate consumer of these projects will also be Chinese nationals. This is interesting, and interesting is a polite way of putting it. What the long-term political implications are, I really can't tell you at this stage, but China did build a port in the southern part of the country, expanded a very small fishing harbor there into a huge port. They now have it on a 99-year lease. From the government. That was Chinese-funded and Chinese-built again. At the same time, they expanded the harbour in Colombo by almost 50%. So really, was there a good business case for this much capacity expansion in a small country in such a short period of time? Possibly not, and both the ports are currently underutilized, so you're looking at the long-term economic business case for this. They also built an airport just very close proximity to the harbor in Hambantota, and nobody flies there because there's no real population in the area, and there's a very small number of people who originate from there who'd probably prefer to come to Colombo anyway.

Andrew Herdman:So that's a white elephant.

Suren Ratwatte:It appears to be. Now, that airport currently seems to be going to be taken over by the Indian Airports Authority. Exactly why, I don't know. Again, a business case is hard to nail down here, but I think it's geopolitics because Sri Lanka is— we're tiny, we're the size of Tasmania and we are surrounded by giants. We've got India just to the north of us who are very ambitious and who perceive a threat from China. And we've got all this Chinese investment in the country. which I think the Indian government feels they need to counterbalance in some way, shape, or form. So whether we are going to profit from this or we're going to get caught in the middle of this and get crushed is something that we'll only know in a few years' time. But certainly, it's quite interesting. Now, when you come back to the airline world, which is what most of us are involved in, traffic flows out of China are fascinating. Rupert eats my lunch on Hong Kong, so we won't even talk about that. But almost the entire traffic flow, which are pretty healthy, about 90% is inbound. There's very little traffic in the other direction for a number of reasons, among which Willy Walsh and Peter were talking about earlier, is the visa issue of going into China. My catchment market is South India and the Indian Ocean region. For businessmen even from that part of the world to go to China is quite challenging to get there. the right paperwork, whereas Chinese nationals come to Sri Lanka, it's visa-free. So we have 90% of the inbounds being Chinese origin and 90% of that is leisure. So there's a very, very limited business traffic between my current hub and China. Now, what the infrastructure was supposed to cater to, I really don't know. Maybe Sebastian can answer that question because— The only logical flow from China via Sri Lanka would be to Africa. There's no other real place that you could go that makes sense. Now, is there a potential market there and is it big enough to support a large number of flights? At the moment, no. I mean, we have almost no traffic to Africa. We don't fly there. Sebastian doesn't come to Colombo and really we don't see a business case for that. The infrastructure is in place. In one way or the other, the Sri Lankan government has paid for it, but right now it doesn't seem to be used and it might be some important linchpin in a much bigger game, but right now, quite frankly, we don't see much use for it.

Andrew Herdman:Interesting. I think you heard from 2 of the speakers there that there's a geopolitical dimension to this and that contrasts with commercial hard-headedness in terms of decisions, and when mistakes are made, that can lead to a reappraisal of the political dimensions. A lot of it has to do with the financing coming from the Chinese banks, some of which are essentially state-directed in terms of how they allocate credit. So I think some interesting lessons to learn from those particular examples of wider applicability. Barry, do you want to just reflect on that a bit? If there's one or two questions from the audience, we're happy to take them.

Barry Parsons:I think the Sri Lankan experience is similar to what I've seen in a lot of African states. So, 3 states I can think of I've been to, looked at Chinese projects, are Togo, Tanzania, and Mozambique, which were around airport construction. And typically, it's got a strategic value, but it's also got a counter-trade reciprocity They typically want resource extraction security, something out of it. That's why they'll build a railway to the coast to drag something down to the beach.

Andrew Herdman:So raw materials from overseas, export Chinese goods, that's the trade?

Barry Parsons:That's a key reason they've been in Africa. So they've just built that railway from Mombasa up the hill, and that's going to be a big game changer in that part of Africa. But what you're talking about in Sri Lanka is You can't see a rational reason for why you need such a big port now, but there's actually something else happening with that relationship between China and Sri Lanka on the other half of the ledger that you can't actually always see.

Andrew Herdman:Sorry, there's a hand at the back. Yes, please. Is it Danny? I can't see.

Barry Parsons:Danny, the South China Morning Post. Suren, do you think the investments China has made in the port and the white elephant airport Sri Lanka's the citizens' confidence in China's investment into the country. And for Rupert, do you see when China invests on One Belt One Road and the likes of Hong Kong that China has to invest carefully because of the skepticism that might be held in Hong Kong?

Suren Ratwatte:You go, I go.

Rupert Hogg:Sorry, Danny. Should I go, Suren, first?

Suren Ratwatte:Yeah, go for it.

Rupert Hogg:Yeah, I mean, clearly everyone, you know, needs to invest carefully. I think the bigger issue for me, when you look at China and you go to China and you look at what the infrastructure has done for economic development, then you can't get off the blocks unless you have a road system and you have A basic infrastructure in many of the economic models in many of the countries that we're talking about, and here is, you know, an opportunity to do just that. And it's so hard to generalize, you know, around different countries because I don't have the knowledge, but I think, you know, what I've witnessed in China over the last 10 years in terms of infrastructural development and everything that comes on top of that To me, it's an optimistic thing for the BRI initiative.

Andrew Herdman:Suren, final word?

Suren Ratwatte:On the investment question, Danny, I wouldn't say it has dented the confidence because the way it's been structured is really quite interesting. The harbor in Hambantota currently leads to China Harbor, and so China Harbor is essentially paying the loan to the Chinese bank that funded it in the first place. How it works out, I don't know, but that's the case. If the airport goes to the Indian Airports Authority, which evidently seems to be the plan, we'll have the Indian government paying the loan to the Chinese bank that funded the airport, so it doesn't really impact very much on the Sri Lankan economy except in a positive way. The infrastructure was built and generally, as Barry said, this is a long-term investment. You know, they made a movie on this, right? Build it and they will come, or something like that, some time ago. So essentially, it's been built. Now the question is, who is going to drive the use of these huge infrastructure projects in a positive way? And I think that'll be eventually the Chinese government that drives that. They have some sort of master plan that they're putting the pieces in play. This is a game of Go, I suppose. And they're moving those pieces very carefully and it's something that, hey, I'm just a pilot, I can't see this stuff. I just pursue my destination.

Andrew Herdman:Too modest. Ladies and gentlemen, our time is up. Please join me in thanking the panel for their insights.

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