“Private businesses are profit-driven, so we should expect them to seek small and low-risk projects,” said Neema, also the francophone editor at The China Global South Project.

“Without the backing of the big policy banks, private businesses don’t have all the necessary tools to navigate complex and unstable environments like in Africa. So, aiming for low-risk projects is the logical choice.”

The Chinese government has seen how debt can be risky for African countries and is becoming more risk-averse, he added. “Small projects are more suitable, easy to manage … and less risky,” Neema said.

China ‘not to blame’ for African debt crisis, it’s the West: study

One of the projects caught up in China’s strategy shift is a major railway in Kenya, built under the belt and road plan. At conception, the line was to run from Kenya’s coastal city of Mombasa to the Malaba border crossing with neighbouring Uganda. Plans were then extended to Ugandan capital Kampala and to other landlocked countries in the Great Lakes region.

Analysts say this could be the end of debt-financed projects, as Beijing encourages more equity investments.

Loans to Africa have dropped from a high of US$28.4 billion in 2016 to about US$1.9 billion in 2020, according to data from Boston University’s Global Development Policy Centre and the China Africa Research Initiative at Johns Hopkins University.

02:09

Kenya opens massive US$1.5 billion railway project funded and built by China

Kenya opens massive US$1.5 billion railway project funded and built by China

A new report by the Green Finance and Development Centre (GFDC), at Fudan University’s Fanhai International School of Finance, notes that the average deal size for construction projects is getting smaller, dropping from US$558 million in 2021 to US$325 million in the first half of 2022.

However, the average deal size for investment projects has increased, driven by a single US$4.6 billion transaction in oil.

“We see two types of large projects to continue: strategic investments (such as in ports and resources), and resource-backed deals (such as in mining, oil and gas),” the study noted.

“Large infrastructure projects in roads and rail have become more difficult to finance due to sovereign debt issues and accordingly an increasing risk,” Christoph Nedopil Wang, GFDC director and author of the report, said.

Smaller projects, such as in information technology or renewable energy, should be easier to finance, Wang said. “Chinese stakeholders have also continued to engage in larger resource-backed projects, particularly in countries with already existing infrastructure,” he added.

Higher oil prices help Angola pay off debts to Chinese banks

Wang attributed the shift in financing to the changing economic risk evaluation in the aftermath of the Covid-19 pandemic, with lower growth rates and higher sovereign debt risks leading to a stronger interest in less risky assets, such as resource-backed deals.

Kanyi Lui, an international project finance lawyer and head of Pinsent Masons’ China offices, has highlighted investments focusing on agrotechnology, poverty alleviation, renewable energy, manufacturing and productive assets and support for trade finance.

Historically, many developing countries suffer from an infrastructure gap and are unable to obtain financing elsewhere. “The belt and road brought the world a lot of infrastructure projects over the last eight years, but we need to remember at its core the [strategy] is about improving global connectivity and trade, and infrastructure is only a part of the strategy,” Lui said.

With the requisite infrastructure in place, many developing nations are now ready for investments in productive assets and trade that will generate better economic returns, Lui said. “This is reflected in the increase in equity investment, people-to-people engagement and trade with China.”

02:02

China is building a new Egyptian capital in the desert under its Belt and Road Initiative

China is building a new Egyptian capital in the desert under its Belt and Road Initiative

Zhou Yuyuan, a senior research fellow with the Centre for West Asian and African Studies at the Shanghai Institutes for International Studies, said the logic of more lending to small or medium-sized projects “makes sense, since it may project more inclusive, catalytic and impactful financing. In short, less big-hand financing, but more inclusive benefits to [belt and road] countries”.

“If the projects are promising with sound economic returns and social impact, I think Chinese financiers will continue to provide loans [to mega infrastructure projects] but may explore well-designed approaches,” Zhou said.

He said there may be two possibilities: joint Chinese and international financing; or public-private partnerships (PPPs), such as build-operate-transfer (BOT) or build, own, operate, transfer (BOOT), which will encourage Chinese companies and the private sector to play bigger roles.

One such BOT project is the US$668 million Nairobi Expressway, built and funded by the China Road and Bridge Corporation. Its subsidiary, Moja Expressway, will operate the road for 27 years to recoup its investment through toll fees.

Zhou said the shift reflects the new priority in taking the belt and road forward, with a focus on quality, debt sustainability, fiscal affordability and inclusive development.

“It is the result of combined factors including budget and debt management in [belt and road] countries, and the cost-risk evaluation of financiers,” he said, other factors being the multiple external shocks to African countries, from economic slowdowns, the Covid-19 pandemic and Russia’s war on Ukraine.