As emerging economies come under sustained fiscal pressures related to the Covid-19 pandemic, questions are being raised about the future trajectory of big-ticket infrastructure projects under China’s flagship Belt and Road Initiative (BRI).
The BRI is a far-reaching plan for transnational infrastructure development, linking five continents through land and sea corridors and industrial clusters.
Launched in 2013, it was initially planned to revive ancient Silk Road trade routes between Eurasia and China, but the scope of the BRI has since extended to cover 138 countries, including 38 in sub-Saharan Africa and 18 in Latin America and the Caribbean.
Prior to the pandemic, the Asian Development Bank estimated that the infrastructure financing needs of emerging Asia alone would amount to $26trn through 2030. It is thus unsurprising that many low- and middle-income countries came to see the BRI as a vehicle for catalysing much-needed investment in capital projects.
By early January 2020, 2951 BRI-linked projects valued at $3.87trn were planned or under way across the world.
Although the criteria for what actually constitutes a BRI project are not formally defined, linking a project to the BRI through a memorandum of understanding (MoU) or another agreement provides access to finance from Chinese policy banks and specialist funds, as well as connections to Chinese contractors and suppliers eager to make use of their excess capacity.
However, as borders began to close in response to the pandemic, and governments shuttered non-essential industries and asked citizens to stay at home, progress stalled on a number of major BRI developments. Restrictions on the flow of Chinese workers and construction supplies have been cited as factors for project suspensions or slowdowns in Pakistan, Cambodia, Indonesia, Myanmar and Malaysia.
“Some BRI projects are in poorer nations, which may require medical and health care assistance to be a priority ahead of continuing infrastructure projects, and this will vary from country to country,” Chris Devonshire-Ellis, founding partner of Dezan Shira & Associates, told OBG.
Taking into account that Covid-19 originated in Wuhan, China, late last year, the use of large numbers of Chinese construction workers on BRI projects has become a contentious issue in some nations, even though China has been relatively successful at containing the spread of the coronavirus within its borders.
“These factors require a considered approach and this will lead to delays in the resumption of projects. However, these issues will be resolved in time,” Devonshire-Ellis added.
Yellow slice projects
In many of the markets that constitute the “yellow slice”of the global economic pie – those dynamic emerging economies that form part of the OBG portfolio – big-ticket BRI projects have been a major driver of infrastructure development in recent years.
For example, Egypt is ranked in the Refinitiv BRI Database as the country with the second-highest number of BRI-linked projects by volume after Russia, with 109 under construction or in the pipeline. It also has the seventh-highest cumulative value of BRI-linked projects (almost $100bn).
Saudi Arabia has emerged as the country with the fourth-highest number of BRI-linked projects by volume (106) and second-highest by value ($195.7bn). Malaysia, Indonesia and the UAE also make the top-10 rankings for both project volume and value.
Major BRI-linked projects under way or in the pipeline in those countries include the 950-MW Noor Energy 1 solar power plant in Dubai; the $6bn high-speed rail line between Jakarta and Bandung in Indonesia; and the China-Egypt TEDA Suez Economic and Trade Cooperation Zone.
Elsewhere, BRI projects underpin the major infrastructure pipeline for some developing states.
For example, in Myanmar, a lower-middle income economy, 33 bilateral agreements were signed in January for the acceleration of the China-Myanmar Economic Corridor (CMEC), which falls under the BRI umbrella. Projects planned as part of the CMEC include rail links and a deepwater port at Kyaukpyu, which will provide a strategic connection between China’s south-west and the Indian Ocean.
Managing the debt burden
One criticism sometimes levelled at the BRI is that developing economies risk unsustainable debt burdens for projects that are not necessarily in their national interest.
For example, in December 2017 Sri Lanka formally ceded 70% control of Hambantota Port to a Chinese state-owned firm on a 99-year lease after it was unable to service loans used to build the $1.3bn strategic gateway on the Indian Ocean.
Perhaps mindful of this example, in 2018 Myanmar renegotiated the cost of the Kyaukpyu deepwater port project down from $7.3bn to $1.3bn, with some Myanmar officials concerned that the project disproportionately served China’s energy, trade and security interests.
However, as the coronavirus-induced economic slowdown threatens to increase the debt burdens on developing economies, and places China itself under added fiscal pressure, Chinese loans linked to BRI projects are once again in the spotlight.
Bilateral loans made by Chinese state-owned institutions to foreign partners have increased in tandem with the proliferation of BRI projects across the world. According to a March 2020 report in the Wall Street Journal, some $200bn in emerging market debt owed to China has not been reported in official figures. Much of this undisclosed debt was traced by researchers to BRI projects.
Meanwhile, a 2019 study by Germany’s Kiel Institute for the World Economy found China was the world’s largest bilateral creditor, and that the combined debt owed to China by 50 developing countries had grown from an average of 1% of their GDP in 2015 to 15% by 2017.
Unlike multilateral institutions, direct loans from China’s policy banks are often extended at commercial rates and secured against collateral such as oil or other commodities.
With many emerging economies now appealing to bilateral creditors and multilateral finance institutions for debt relief and restructuring, it remains to be seen how China will respond.
In the past, China has preferred to conduct debt renegotiations on a private, government-to-government basis. However, it was seemingly included in a G20 agreement for a temporary moratorium on debt repayments from the world’s least developed countries to bilateral creditors, which was announced on April 15.
The example of Myanmar’s Kyaukpyu port – as well as the 2019 renegotiation of Malaysia’s East Coast Rail Link, which reduced the cost by one-third – should provide further hope to countries signed up to the BRI that may now be re-evaluating costs and benefits.
With China’s economy contracting in the first quarter of 2020 for the first time in decades amid rising unemployment claims at home, Chinese capital is likely to be mobilised to meet domestic needs in the short term, which could translate into reduced investment in the BRI’s more peripheral markets over the next 12 to 24 months.
Combined with the fact that many of the countries signed up to BRI projects face escalating foreign debt pressures, the stage may be set for a long-term reorientation towards more strategic and cost-efficient infrastructure projects, which meet clearly defined domestic or regional demand, and rely less on opaque loans from Chinese policy banks.
BRI projects in the pipeline could be made more open to varied financing options involving multiple stakeholders, such as multilateral institutions, foreign banks, private equity and green bonds. This could help to spread financial risks and promote greater levels of transparency, efficiency and innovation.
Some of China’s neighbours and financing institutions active in Asia are well positioned to play a greater role in BRI projects. For example, Singapore has the technical and financial ecosystem necessary for structuring, funding and executing major infrastructure projects in South-east Asia, as well linguistic and cultural ties to China that should make it an attractive partner.
Even before the pandemic, private financing and co-financing had been playing a growing role in BRI projects.
Efforts have been to adopt formal lending rules similar to those of multilateral development banks (MDBs), and in March 2019 China’s Ministry of Finance signed an MoU with several MDBs to establish a Multilateral Cooperation Centre for Development Finance.
As of December 31 project financing was the main source of funds for 676 out of 1015 projects analysed in the Refinitiv BRI Database. Private sector finance accounted for 20.5% of the total funding for all projects in the database, while publicly listed firms contributed 6.8%.
However, these totals are still significantly less than the 46.1% of finance attributed to government institutions.
“China was increasingly open to the multilateralisation of the BRI prior to the pandemic and that will no doubt continue, with capital from multilateral institutions and private sources needed for certain projects to be sustainable,” Parag Khanna, founder and managing partner of FutureMap, told OBG.
However, Khanna, author of the book The Future is Asian, does not believe China’s domestic obligations will detract attention from the BRI.
“The BRI will not lose importance for China, because it is a significant portion of its grand strategy. Much as we see China continuing its military doctrine of probing for opportunities, it will still seek to use BRI as an umbrella for increasing its geographic connectivity, supply chain efficiency and commercial leverage with key states in Asia, the Middle East, and beyond,” he added.
Broader infrastructure challenges
Beyond the BRI, the infrastructure industry in general is grappling with severe challenges as a result of the Covid-19 pandemic.
These include external financing bottlenecks, difficulties in mobilising consultants and contractors, delays in government approvals and permissions, and slowdowns in productivity related to remote working, according to Allard Nooy, CEO of InfraCo Asia, a donor-funded, commercially managed infrastructure development firm.
Due to constraints on the movement of construction equipment and materials, the crisis is also highlighting the need for logistics and supply chain diversification for better crisis management. There are indications that many Chinese manufacturers serving the construction industry have begun to cultivate alternative supply chains in South-east Asia.
Notwithstanding physical disruption to the infrastructure sector, much preparation work can still be performed online, allowing some progress to be made on certain projects. Promisingly, such projects include many that form part of the so-called green economy, which could emerge as a sustainable, high-growth segment as policymakers seek long-term recovery strategies.
“Support for renewables in the pipeline appears strong, perhaps because such projects typically face relatively fewer construction issues and also tend to have a more straightforward revenue structure than other types of infrastructure. This allows for easier credit assessment compared to larger scale infrastructure projects, where revenue is exposed to market – or usage – risk”,” Seth Tan, executive director of Infrastructure Asia, a facilitation office under the Singapore government, told OBG.