One Belt One Road not a ‘fountain of easy money’

Panellists at the Belt and Road Summit in Hong Kong addressed the risks associated with China’s landmark initiative, sounding the alarm over opportunistic behaviour, unsustainable debt and ignoring ESG factors.

There is no doubt that a huge opportunity is emerging for developing countries affected by China’s One Belt One Road initiative, given the region’s fundamental demand for infrastructure, but no one should overlook the potential risks, panellists told attendees of the Belt and Road Summit, an event hosted by the Hong Kong Trade Development Council on Thursday.

“First of all, there is the risk of misunderstanding and abusing the One Belt One Road initiative as a fountain of easy money,” Geert Peeters, chief financial officer of Hong Kong-listed power utility CLP Holdings, warned during a panel discussion. “That would lead to some opportunistic behaviours; some smaller parties might be taking [on] too much investment on their shoulders, while […] other parties [may] want to push too many investments on to others. This leads to risks and problems,” he said.

According to Peeters, CLP focuses on the fundamentals of the projects, including governance. “Are they focused on good value for money, or quickly getting as much infrastructure as possible, which could overload local governments with debt?” Peeters also highlighted the importance of including an ESG element in the risk-mitigation process for projects in emerging markets. He noted that two-thirds of the world’s population lives in the OBOR region, creating an energy-intensive environment.

Overlooking environmental and resources-related factors ranked second on Peeters’ list of risks. CLP – which has a very long-term investment horizon, in some cases as long as 50 years – has set its own sustainable goals to mitigate risks related to climate change, he said.

According to Peeters, another risk factor that must be taken considered is project size. For larger schemes, he recommends a consortium approach, making sure the investment is localised. For projects which may be too small to be of interest to CLP, such as solar projects in rural areas, Peeters hopes to see more support from small local financiers.

Tim Warren, head of credit lines in Asia-Pacific at Zurich Insurance Company, underscored the importance of political risk. He said across 70 to 80 countries covered under the OBOR initiative, 40 are considered frontier markets, where credit risks range from medium to high. At the same time, “there is an increasing number of insurance companies offering products for mitigating politics-related risks, such as terrorism, civil wars and political violence,” he added.

While many risks discussed focused on the development phase of the projects, what happens in the next 15 years after the project reaches financial close also presents a level of risk, noted Mark Moseley, chief operating officer of Global Infrastructure Hub. He commented that investors should be prepared for any disputes and therefore finding the right jurisdiction with good rule of law and a regulatory framework for arbitration, such as Hong Kong or Singapore, is also important.