Try to speak with private investors about China’s ‘Belt and Road Initiative’ (also known as ‘One Belt, One Road’), and you will be greeted with a blank stare, and maybe a quick glance at their watches.
On paper, Beijing’s signature initiative, announced in 2013, should be an attractive proposition for infrastructure-focused private capital. The plan initially aimed to improve infrastructure links across 65 countries that account for 44 percent of the world’s population. According to some estimates, it will encompass investments of up to $1.3 trillion by 2027.
But despite its gargantuan scale, international investors have found little room to participate in it, often describing it as a “Chinese-captive” project, led by Chinese contractors and financed by state-owned financial institutions.
“BRI remains predominantly debt-financed, with Chinese entities, particularly policy banks and state-owned enterprises, the largest source of funding,” Moody’s said in a recent report.
Similarly, accusations of lack of transparency on lending conditions and money squandered on unsustainable projects abound. “Some of these projects are choosing Chinese lending because that kind of financing is not available elsewhere, and there might be a reason for that,” Christian de Guzman, vice-president and senior credit officer, sovereign risk Group, Moody’s, tells us.
The cracks are starting to show, with countries like Malaysia and Pakistan, home to some big-ticket projects under the initiative, starting to reconsider their involvement in BRI – or cancelling their projects altogether.
Mistrust against the BRI contrasts with views on the Beijing-based Asian Infrastructure Investment Bank. The multilateral institution was announced in 2013 and was initially seen as another tool to advance China’s signature Belt and Road initiative. But it soon distanced itself from the Belt and Road framework, a development investors did not miss.
“When you look at the projects approved by the AIIB, it almost seems they have been bending over backwards to pursue projects that are not [tied to the] Belt and Road,” de Guzman says.
As a result, the AIIB is now perceived as a healthy competitor to similar multilaterals, like the Asian Development Bank. Since its official establishment in January 2016, the AIIB has invested $7.5 billion in 35 projects, more than half of them jointly with other multilaterals.
Part of that success probably comes from the early participation of Western countries in setting up the bank. The UK, Australia, France and Germany, among others, became founding members and actively participated in the process of drafting up the bank’s rules, setting it apart from projects led by China’s state-owned financial institutions. That’s not to say opportunities might not still emerge from the Belt and Road initiative. Some Chinese engineering, procurement and construction contractors might decide to divest some of the assets they built in the future, bringing new opportunities to the market, an industry insider told us recently.
And the initiative has also stimulated a raft of competing plans from Japan, the US and the EU to boost much-needed infrastructure spending in emerging markets.
But if China wants the Belt and Road to truly prevail, the AIIB experience offers a valuable lesson to Beijing: long-term, sustainable projects are best achieved through international co-operation and high financing standards.