Hong Kong, 15 Feb 2017 - PwC today launches its first PwC B&R Watch: a review of capital project and deal activity across the 66 countries that fall under the Belt & Road Initiative (B&R). The review finds that over US$490bn of projects and deals were announced in 2016 across seven core infrastructure sectors (Utilities, Transport, Telecoms, Social, Construction, Energy and Environment). A third of all these were in China, with the remainder spread across the rest of the B&R region.
PwC B&R Watch finds a positive picture in 2016, with an increase in the volume and the average dollar value of infrastructure projects. In China, the average project size increased by 14% - largely driven by public expenditure on infrastructure as a central pillar of economic policy.
"Based on the available data, there was $493bn of new projects across the B&R region in 2016," says Gabriel Wong, Head of Corporate Finance for PwC China & Hong Kong. "There was a rise in project dollar value as governments battled to revive growth. However, M&A activity points to a decline in volume and dollar value, reflecting a flight to quality and renewed focus on project economics. Hence the overall deal value of projects and M&A was down from what was a record level of $573bn in 2015."
"We saw 4.6% GDP growth across the Belt and Road region in 2016," says Simon Booker, Infrastructure Leader for PwC Hong Kong. "This compares very well with the emerging markets average of 3.6% and was fuelled by a focus on new infrastructure projects. China’s GDP growth of 6.7% was also a strong performance given wider global macro-economic uncertainties."
The review uncovers striking growth in the size of capital projects across the B&R region. The value of the average project was 47% higher than in 2015. The increase in China was 14%. The trend is now well-established - the value of invested projects across the region has been growing at a compound annual growth rate (CAGR) of 33% since 2013. This growth is evident in all the core infrastructure sectors studied.
The People's Bank of China cut reserve ratios in 2016 to encourage lending. This, together with modest levels of inflation, means that real lending rates fell in 2016. Much of this new lending was channelled towards infrastructure and construction projects.
Looking at specific sectors, PwC sees potential for significant growth in power utilities in a number of middle-income B&R countries. Ageing populations, high fertility rates and insufficient hospital capacity will also spur healthcare investments. Significant rail expansion in countries along B&R corridors, such as Russia, Kazakhstan and Mongolia, is also expected.
Looking forward, the report sets out five key trends that are expected to drive further investment and deal volume growth in the Belt & Road region in 2017. The report also suggests that there could be greater appetite among investors to look at 'frontier' markets throughout the B&R region, though this will require new skills and expertise as they assess unfamiliar country and regulatory risks.
Many governments across the region are keen to promote projects that will counter economic slowdown and help transform economies that have been dependent on commodities and on carbon-intensive sources of energy - aligning themselves with the current focus of the Asian Infrastructure Investment Bank.
"We see more project announcements across B&R in 2017 as governments continue to tackle economic slowdown. Many of these will come from China, as Beijing will need to supplement current announced packages to keep up the pace of investment and drive momentum behind its Silk Road ambitions," says Mr Wong.
Wayne KH Yim
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