COOPERATION BETWEEN CHINA AND LATIN AMERICA WITHIN THE EXTENDED OBOR INITIATIVE: A CASE STUDY ON RAILWAY INFRASTRUCTURE

JORGE E. MALENA

Director and Senior Lecturer, Contemporary China Studies (Universidad del Salvador –Buenos Aires,Argentina); Chairman, China Working Group (Argentine Council for International Relations)

The People’s Republic of China(hereafter PRC) has been a strategic partner for the Latin American and Caribbean region, as revealed by the unceasing efforts made by both parties and as displayed in China’s Policy Papers on Latin America and the Caribbean (LAC), published in 2008 and 2016.Both LAC are significant axes for carrying out China’s comprehensive opening up policy. In particular, since the beginning of the 21st century, with the steady deepening of economic globalization,the trade and financial relations between China and Latin America have achieved unparalleled leap-forward growth.

After almost 30 years of growing political cooperation and economic integration, China and Latin America have molded a close relationship. As the two sides are going through economic restructuring, there is a mounting need for moving towards quality growth. A new structural complementation has arisen, demanding further cooperation between the two sides to institute operational paths.

The Sino-Latin American general cooperation and the strategic spirit of the building of “the Belt and Road Initiative” (BRI) enjoy the same foundation,and the former is the likely extension of the latter. In particular, the construction in infrastructure (such as the ocean-toocean railway system) has grown into a shared consensus.

Against this backdrop, the Integration of the Regional Infrastructure of South America (its acronym in Spanish IIRSA), has experienced noteworthy development. The integration of railways is a crucial component of the IIRSA,whose plans for railway reconstruction and development provide outstanding opportunities for the cooperation of railway construction between China and South America.

This paper aims to analyzing South America’s synergy with the BRI in terms of infrastructure development,probing into the feasibility of railway development. It includes a case study on China’s contribution to the development of railway lines in Argentina,a leading South American nation. Its conclusion identifies the pros and cons of extending the BRI to the railway domain, namely geopolitics, hubs and terms of financing.

The Central Role of Infrastructure in Latin America’s Development

Improving infrastructure integration is one of the crucial preconditions for developing countries to join in the process of economic globalization and to obtain developmental gains.

Challenged with such a great request for investment, most developing countries do not have enough domestic savings, and government and private funding for investment are also restricted.While multilateral financial institutions have made substantial contributions,they are still far from meeting their demands.

With the world’s political and economic focus shifted to Asia and the Pacific, economic cooperation around the Asia-Pacific region has become the focus of present-day international affairs.Accordingly, Latin American countries have considerably augmented their attention on the Asia-Pacific. This trend has been embraced by South American countries, where most nations recognizing officially the PRC in the Latin American subcontinent are located.

Since the beginning of the 21st century, China has become a leading trading partner for Latin America. Whereas in 2000 just 1% of regional exports were sent to China and 2% of imports came from there, in 2015 these figures had risen to 10% and 18%, respectively. China is already the first or second destination for exports from several South American countries, and it is one of the three top providers of imports for nearly all Latin American countries.

In addition, particularly since 2010 China has become a relevant foreign investor in the region — reaching its historical peak that year with around US$ 14 billion (equivalent to 11% of the total FDI received by the region in 2010)— and an important source of credit for some countries. Furthermore, under the China-Latin American and Caribbean Countries Cooperation Plan (2015-2019),both parties expect to increase trade to US$ 500 billion and reciprocal direct investment to US$ 250 billion by 2025.

Latin American countries have therefore prioritized China when adjusting their foreign policies. In addition to realistic economic considerations, strengthening the partnership with China is also in line with the geopolitical interest of Latin American countries of diversifying diplomatic relations and upholding independent foreign policies.

From August 31 to September 1, 2000,heads of state from 12 Southern American countries, including Argentina,Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname,Uruguay, Venezuela jointly proposed the Plan of Action for the Integration of Regional Infrastructure in South America in the jointly issued communiqué in Brasilia. In December the same year, ministers of 12 countries in charge of transport, energy, and communications held a ministerial meeting in the Montevideo, Uruguay’s capital, formally putting forward the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA) and the 2000-2010 Action Plan.

The organization of the IIRSA includes the Coordinating Committee,Coordinating Committee on Financing,Working Groups, the Secretariat and other supporting bodies. The Coordinating Committee has a number of working groups amongst them the Working Group on Rail Integration, which was established in November 2011 (it held its first meeting in September 2013). The Working Group on Rail Integration is further divided into a number of subgroups in charge of the several railway corridors. The Coordinating Committee on Financing is composed of multilateral financial institutions such as the Inter-American Development Bank, the CAF-Latin America Development Bank and the La Plata Development Fund(FONPLATA). The Secretariat sets up its office in Buenos Aires, Argentina.The Secretariat works with the Inter-American Institute for Integration of Latin America and the Caribbean (its acronym in Spanish being INTAL) of the Inter-American Development Bank,which is in charge of daily activities.

On December 4, 2014, the South American Infrastructure and Planning Council (COSIPLAN) of UNASUR held its annual ministerial meeting in Montevideo, Uruguay, to discuss the work summary 2014 of the IIRSA and to approve the work plan 2015.

According to the “Work Summary 2014”, the IIRSA has confirmed 579 Integration Priority Projects by September,2014. The total investment amounts to US$ 163.3 billion, involving three major sectors in transport, energy and communications.

The “Belgrano Railway Reconstruction Project” was jointly carried out by Argentine state-owned enterprises and Chinese financial institutions and enterprises.The China Machinery Engineering Corporation (CMEC) is an important participant in the project. The picture shows that a freight train jointly developed by CMEC and CRRC arrived in Buenos Aires, Argentina on January 3, 2018.

The Prospects for Infrastructure Cooperation between China and South America

In 2008, the Chinese government recommended Jointly Building a Comprehensive Partnership in the New Era,and published the China’s Policy Paper on Latin America and the Caribbean,the first policy document formulated by the PRC toward the region, as a parameter of China’s policy towards Latin America.

Almost ten years after the publication of this hallmark document, innovation of bilateral cooperation between China and Latin America calls for infrastructure construction and interconnection.The construction of the major infrastructure in Latin America, such as the ocean-to-ocean railways, does not only meet the need to reduce the regional transportation cost, enlarge the scale of trade, but also promotes the docking of markets and industries.

In line with the available information, the infrastructure investment by sector in Latin America in 2012 was only 3.49% (as a percentage of GDP). To close the gap between the supply and demand of infrastructure, the countries of the region should invest yearly 6.2%of their GDP between 2012 and 2020— some US$ 320 billion. According to ECLAC, these investments in transport,energy, telecommunications, water and sanitation works will contribute to increasing the coverage and quality of infrastructure services and will increase the general welfare of the population.

According to Corporación Andina de Fomento (CAF), logistics costs in LAC range from 18% to 35% of the final value of the products, compared to 8%in OECD countries. For small and medium-sized enterprises, this percentage can exceed 40%. If all countries in the region would improve their infrastructure to the average level of other middle-income countries, regional growth in Latin America would increase by an average of 2 percentage piont a year.

To increase export to China, countries in Latin America should strengthen cooperation with China in infrastructure construction. The First Ministerial Meeting of the China-CELAC Forum, held in Beijing in January 2015, approved the China-Latin American and Caribbean Countries Cooperation Plan (2015-2019).The IV part (Infrastructure and Transportation) in the cooperation plan made it clear that China and Latin American countries would promote infrastructure development in areas such as transportation, ports, roads and warehouse facilities, business logistics, information and communications technologies, broadband, radio and TV, agriculture, energy and power, and housing and urban development.

When Chinese President Xi Jinping began a state visit to Peru on November 2016 after the conclusion of the APEC Economic Leaders’ Meeting in the Peruvian capital of Lima, he stressed that the Belt and Road is an open initiative and that China is looking to bringing its international trade and infrastructure initiative known as the Belt and Road to Latin America. He said China“welcomes all countries along the route and in Asia, as well as our friends and partners around the world to take part in these endeavors”.

When President Xi Jinping ended his third visit to Latin America in November 2016, the PRC issued a second China’s Policy Paper on Latin America and the Caribbean. The document puts forward 39 cooperative conceptions in 8 major areas: politics, trade, society, culture, international collaboration, peace,security, judiciary, overall cooperation and tripartite cooperation, many of which are new areas.

On May 14th 2017, on the occasion of the Belt and Road Forum for International Cooperation, Chile’s President Michelle Bachelet expressed her view on B&R’s complementarity with Latin American infrastructure projects. She started by saying that “fortunately, in areas like infrastructure, connectivity and sustainable development, there are clear openings for more cooperation at the regional and global levels. We see the BRI as key in this process, as it promotes regional trade agreements and improves connectivity in Asian countries, Europe and Africa, but also in Latin America. Chile welcomes the great effort led by China to search for new mechanisms to bring us closer together, in connectivity, innovation and sustainable development. The breadth of the OBOR, the high level of participation and its strategic dimensions, highlight its capacity to become the biggest economic cooperation project in place today”.

President Michelle Bachelet of Chile stated that Chile is pleased to see the great efforts China has made to build closer ties with Chile in such areas as interconnectivity, innovation and sustainable development. The picture shows the Punta Sierra wind farm, the first China-funded wind power plant in Chile.

With regards the development of Latin America’s infrastructure through the BRI, President Bachelet said: “Chile has been working to make integration a reality. We have advanced together with Brazil, Argentina and Paraguay, to implement a Bioceanic Corridor between Puerto Murtinho in Brazil and the ports in the north of Chile that will connect the Atlantic with the Pacific Ocean in a fast way. We are also working with Argentina on three priority infrastructure projects, which will better connect us.Initiatives like these are backed by the political will of our countries. They require, at the same time, a strong investment and could be an integral part of the BRI”.

Similarly, on May 15 2017, Argentina’s President Mauricio Macri said that the possibility of South America converging with the BRI “is an opportunity we do not want to miss”. Macri formulated these concepts by presenting on the topic “Synergy Policy for a Closer Association” with other leaders in the Yanqi Lake International Conference Center at Beijing.

In this regard, he said that there is a coincidence with the initiative presented by the President of China, Xi Jinping, in order to create “an architecture of open,inclusive and balanced global economic cooperation that benefits everyone and contributes to boost our own objectives of poverty reduction and creation of economic opportunities through the development of logistics, energy and productive infrastructure”. The Head of State indicated that in UNASUR, whose presidency was upheld that year by Argentina, there is a decision to establish the Integration of the South American Regional Infrastructure (IIRSA), with which “we seek to achieve greater and more sustainable physical integration”.He remarked “We are interested in OBOR being articulated with IIRSA to promote between our regions the key to the 21st century: connectivity”.

In accordance with the view presented by the Chilean and Argentine Presidents, Alicia Bárcena, the Executive Secretary of the Economic Commission for Latin America and the Caribbean(ECLAC), said during the high-level meeting that took place in the Chinese capital on May 14-15: “The countries of Latin America and the Caribbean have a historic opportunity to strengthen ties with China and the rest of the Asian economies, and the Belt and Road Forum for International Cooperation offers us a civilizing proposal of interconnectedness and shared prosperity”.She added “the Belt and Road Initiative represents a renewal of, and a profound commitment to, the values that are fundamental for our global economic and social well-being: interconnectedness,deeper trade and investment ties, transparency and openness, and the need for economic growth to be coupled with social progress”.

Finally, Chinese Foreign Minister Wang Yi when jointly meeting the press in Panama City with Vice President and Foreign Minister Isabel Saint Malo de Alvarado of Panama on September 17,2017, expressed that Latin America is the natural extension of the 21st Century Maritime Silk Road, and the Belt and Road Initiative has become a new opportunity for current China-Latin America cooperation.

To conclude, these assessments suggest that there are concrete projects to materialize the extension of the Belt and Road Initiative to Latin America,being South America an appropriate region to steer such extension.

A Case Study on China’s development of South American railways:The “Belgrano Cargas Refurbishment Project”

In terms of trade, China became in the mid 2000s Argentina’s main Asian partner (and the second worldwide after Brazil), whereas a decade later turned out to be Argentina’s main investor and lender. China’s two most important investment of its type in Latin America are located in Argentina: the “Belgrano Cargas Refurbishment Project”(amounting almost US$ 2.5 billion) and the “Santa Cruz River Hydro-electrical Resources Exploitation Project” (totaling US$ 4.7 billion).

As Argentine expert on Chinese investment in infrastructure Dr. Juan Uriburu Quintana has explained in detail, the “Belgrano Cargas Refurbishment Project” (hereafter BCRP) was put into practice by Chinese financial insti-tutions and corporations associated with Argentine firms (State-owned). From the Chinese side, financial support was provided by the China Development Bank (characterized by its strategically oriented lending activities), the Industrial and Commercial Bank of China and the Bank of China (more commerciallyoriented). There was also the insurance company China Export & Credit Insurance Corporation (a.k.a. “Sinosure”),while the contractor firm was the China Machinery Engineering Corporation.

From the Argentine side, the clients were the ministries of Finance and Transport, and the firm “Trenes Argentinos Cargas y Logística S.A.” (TACyLSA)which operated under the business name “Belgrano Cargas y Logìstica S.A.” (BCyLSA). It should be noted that the latter is a State majortity shareholding company, given its composition by State-owned enterprises: “Sociedad Operadora Ferroviaria S.E.”, “Administración de Infraestructura Ferroviaria S.E”, and “Administración General de Puertos”. TACyLSA was created by Presidential Decree number 566 on May 21 2013, 21 by Head of State Cristina Fernández de Kirchner (being at that time Minister of Transport Mr. Florencio Randazzo).

The Decree states that the BCRP is “a central tool” for achieving broad economic policy goals and regional development in particular, through increasing the national cargo system total capacity and contributing to the connection of production centers with merchandise collection centers, ports and consumers’areas. This document also defines the BCRP as a “key factor” for the development and growth of Argentina’s local economies given its contribution to exports, as well as “a priority” to the Central State because of its commitment to providing cargo transport services in the respective railway line.

There were two contracts signed in the year 2010 (which were amended four times until final approval in the year 2014): a financial agreement between the above-mentioned banks and Argentina’s Ministry of Finance, and a commercial agreement between the contractor and the client (Argentina’s Ministry of Transport). The approximate US$ 2.5 billion are financed by the two governments: the PRC’s provides 85%(US$ 2.099 billion) and Argentina’s the remaining 15%. With regards China’s financial contribution to the project,the China Development Bank provides almost 91% of the funding, while the Industrial and Commercial Bank of China runs with the remaining 9%.

The total amount of financing is divided equally between the procurement contract and the civil works contract(US$ 1.235 billion each). The procurement comprises one hundred engines(narrow, medium and broad gauges);3,500 new freight cars (for the three types of gauges); spare parts for other 2,000 freight wagons; 2,500,000 concretemade sleepers and 200,000 tons of rails.

This mega-project encompasses the refurbishment of three railway lines:“Ferrocarril San Martin” (broad gauge 1,676 mm), “Ferrocarril General Urquiza” (medium gauge 1,435 mm) and“Ferrocarril General Belgrano” (narrow gauge 1,000 mm). The existing equipment of the three lines accounts for 88 engines and 4,650 wagons. Its cargo network extends along 17 provinces and reaches Buenos Aires’ City Railway Terminal (called “Retiro”).

This huge network covers 9,344 km,goes through Argentina’s 70% of its territory and connects with five international crossing passes that link the country with Chile, Bolivia, Paraguay,Brazil and Uruguay. In particular, the C14 railway branch that goes through the Salta-Socompa-Antofagasta crossing pass could open Argentina another access to the Pacific Ocean across Chilean ports, which in turn may burst sales to Asian markets.

In his visit to China for the BRI Forum in May 2017, President Macri signed an agreement to extend the credit aimed to refurbishing the Belgrano Railroad’s cargo branch. On an original loan of US$ 2.47 billion, this extension was another US$ 1.6 billion to advance the works. The loan comprised aspects such as a greater participation of components of national origin and the inclusion of key works for the integral recovery of the railway.

Specifically, it was agreed that the component of national origin be 65%and the remaining 35% of inputs such as rails and track fixings, maintenance machinery and rolling stock. The goal was to increase the number of tons transported by fivefold, growing from 847,282 in 2015, which was the lowest figure in history, to 4.4 million tons by 2019. The first stage that is in full execution for the sections Santa Fe, Chaco and Santiago del Estero, will cover 535 kilometers. The second consists of 500 kilometers in Salta and Jujuy and will begin before September. The third phase, covering 558 kilometers, was tendered soon after. It is expected that all the works will be completed by the end of 2019.

To conclude this section, it can be said that Argentina is one of the largest producers of cereals in the world,but logistics costs demand up to 50% of the total due to the antiquated railway infrastructure. With the refurbishment project in cooperation with China,Argentina seeks to increase its international competitiveness by reducing the prices of its agricultural products. The BCRP doesn’t have precedents in Argentina’s railways history in terms not only of scale but also capital. Also, it can be affirmed that there is no investment in strict sense but project financing instead. The party most benefited with the agreement is CMEC, given the circle in which the capital leaves China but returns through the Chinese State company. As Kevin Gallagher assessed when analyzing China’s financial support to Buenos Aires, “the US$ 10 billion line of credit China granted Argentina is in fact a line of credit to Chinese railways companies, which means the capital will stay in China”.

The pros and cons of extending OBOR: geopolitics, hubs and terms of financing

China’s Belt and Road Initiative stretches ever further around the globe,which converts it into a geopolitical phenomenon. For the first time in memory, an Asian power has the potential for a significant footprint in Latin America: if there is to be new major infrastructure in Latin America, it will be Chinese rather than US interests leading the way. In addition, trade between China and Latin America has grown 22 times since 2000 to over $200 billion annually As the world is redefined by China's outward thrust, the current US administration seems more committed to undoing existing relationships with both Asia and Latin America than in restoring Washington’s position.

According to the IIRSA, South America can be divided into ten Integration and Development Hubs, which encompass more than 500 projects from three major sectors in transport, energy and communications. Such Integration and Development Hubs are in alphabetical order: Amazon Hub, Andean Hub, Capricorn Hub, Central Interoceanic Hub,Guianese Shield Hub, MERCOSURChile Hub, Paraguay-Paraná-Waterway Hub, Peru-Brazil-Bolivia Hub, Southern Andean Hub and Southern Hub.

Within these ten hubs several Integration Priority Projects (in Spanish PPI)are identified, in relation with the development of four bioceanic corridors and three economic belts at the Amazon Hub, the Capricorn Hub, the Central Interoceanic Hub, the MERCOSUR-Chile Hub and the Peru-Brazil-Bolivia Hub.They account for a total investment of US$ 140 billion.

The advancement and implementation of the IIRSA are confronted with two major difficulties or challenges. The first difficulty is the shortage of financing and the second one is the terms of financing provided by the PRC. The IADB is the main source of financing for the IIRSA. Since 2000, the IADB has been providing financing for the IIRSA. In the decade from 2000 to 2010, $ 2.9 billion of loans were issued by the IADB to support almost thirty projects, accounting for 28% of all investment.

In November 2017, Argentine Ambassador Miguel Velloso affirmed in Chile“based on constant 2010 prices, qualified studies estimate that between 2011 and 2040 the total demand for infrastructure construction in Latin America will reach US$ 1.32 billion. All these works must be financed by the IADB, CAF and FONPLAN”.

He went on saying “the good news is that China is a member of the IADB since 2009, and according to the Inter-American Dialogue, between 2005 and 2016 it displaced the World Bank and the IADB, becoming the main source of loans, with a value of US$ 141 billion towards Latin America and the Caribbean. But the bad news is that far from channeling its financial contribution to the region through this regional institution (the IADB), it has bilateralized its financing offer through the bilateral CELAC-China scheme, where it easily imposes its rules”.

Velloso affirms “clearly, the biggest problem will be the financing of the undertakings, but not the only one. The Chinese public works companies are in expansion in the world, due to the expansion of the Belt and Road, and their presence in our region acquires more and more dimension. Today it is observed that there is a strategy that would disrupt the traditional pattern of current interregional exchanges, from raw materials for manufactured products, to raw materials for infrastructure works,but carried out by Chinese companies”.

Then, Velloso concludes “all this calls for consideration of a Regional Investment Agreement, within the CELACChina framework, which takes into account the potential of our infrastructure companies in the integration undertakings. If it were possible to move forward with an agreement of these characteristics, the confidence between both parties would increase, and therefore the Center-Periphery modus operandi that characterized the financing of post-Bretton Woods would be modified”.

Final Remarks

East and Southeast Asia demand for natural resources from Latin America will continue to grow, and China is not exception to the rule. From 2016 to 2020,the expected average growth rate per year of China’s import of agricultural products, minerals and crude oil from Latin America are 3.8%, 5.8% and 6.1%respectively; from 2021 to 2030, these number are expected to be 2.0%, 2.8%and 2.7%.

One of the bottlenecks that deter economic growth in Latin America is its insufficient infrastructure; therefore inadequate infrastructure in the region is critically hindering its trade with China.The call for investment into the infrastructure construction in Latin America has turn out to be central. That is the reason why infrastructure is increasingly becoming a major part of the cooperation between China and Latin America.

The IADB has defined the IIRSA as the most imaginative and dynamic initiative for regional infrastructure development undertaken in the Western Hemisphere.The quinquennium 2018-2022 is an important period for the IIRSA to continue to progress, during which 63 priority projects are expected to be completed, such as the Port of Antofagasta (Chile) — Port of Paranaguá(Brazil) Bioceanic Railway Corridor API project. In the light of IIRSA’s thrust which is hindered by lack of funding,the IIRSA would be able to become a key platform for the cooperation in infrastructure between China and South America.

In the Belt and Road, China has engaged itself in promoting cooperation in the construction of infrastructure,energy resources, manufacturing, market and other capacities. As a result, the construction of a Trans-Pacific Economic corridor linking Latin America and China might be an extension of the BRI.

In the light of the positive prospectus for South America, national authorities should pay particular attention to the financial dimension of this undertaking,given that it is suggested that works related to infrastructure, in case the support of the PRC is available, they should abide by the same rules of the game that Beijing imposes on companies that invest in its territory, that is to say associating with foreign companies with local ones, in all large-scale initiatives.The extent to which South America may benefit from higher Chinese commitment with the region will depend more on its aptitude for strategic provision, policy coordination and ability to deal with Beijing than on being incorporated to the BRI.