Special Report – Belt and Road

Cost of funding ‘Belt and Road Initiative’ is daunting task

Funding is proving to be quite a task as estimates for the capital needs of projects range from US$4 trillion to US$8 trillion

PUBLISHED : Wednesday, 27 September, 2017, 4:45pm
UPDATED : Wednesday, 27 September, 2017, 4:45pm

As China pushes development projects around the region through its “Belt and Road Initiative”, increased exposure to countries with poor credit profiles could put the nation at risk of being bogged down by the costs involved.

Credit rating agency Moody’s warned in a report that the initiative should prove to be a positive for China but may pose a credit risk.

“Our ‘report card’ on BRI indicates that overall it generates more positive than negative effects both for China and the recipient countries,” says Michael Taylor, Moody’s managing director and chief credit officer, Asia-Pacific.

The challenges emerge in the implementation of the initiative and could create more exposure to countries with poor credit profiles and limited financial strength.

More than one-third – 37 per cent – of BRI investments from China have gone into countries with ratings of Ba1 or lower. Take out Singapore and that jumps to more than half – 54 per cent.

Financial institutions, particularly regional banks with operations throughout belt and road countries, are aware of the opportunities and risks inherent in investing in those countries.

Highlighting the needs of the region is one thing, funding it is also proving to be quite a task. Estimates for the capital needs of projects under its scope range from US$4 trillion to US$8 trillion over an indefinite period. Not a number to sneeze at, even at its minimum estimate.

“China will provide concessional funding through institutions like the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund,” says Ben Simpfendorfer, founder and CEO of consultancy firm Silk Road Associates.

“But Chinese banks alone will not be able to fully fund these Belt and Road projects as the scale of the initiative expands. That’s when private capital will come in and public-private partnerships (PPP) have an important role to play.”

Countries that do not have a long history of proven projects may need more state-driven initiatives to build confidence in potential investors
Darcy Lai, Standard Chartered Bank

Darcy Lai, managing director and regional head of global banking, corporate and institutional banking of Greater China and north Asia at Standard Chartered Bank, feels that it is about finding a suitable investment entry point that would be a good fit for the bank.

“The initial stages of development may not be for every bank, as it might too challenging for the banks with low risk appetites to go in with so much uncertainty and lack of immediacy in terms of returns on investment,” he says.

“For emerging but unproven markets, I would recommend it to banks that already have a strong local presence in a country and want to affirm their commitment there.

“Otherwise, the later stages might be a more comfortable fit for banks in countries without much proven investment returns. Examples include real estate developments along newly built railway lines.”

Lai adds that it helps to build confidence in an emerging market’s project if other institutions get involved.

“PPP makes sense for more developed nations. But countries that do not have a long history of proven projects may need more state-driven initiatives to build confidence in potential investors. Otherwise, they will need other institutions to invest in them to create some tailwind that will bring in other investors,” he says.

Lai adds that PPP could give countries more control over their infrastructure without fear of outside interference.

Simpfendorder, in discussing the benefits of a PPP financing model, says: “PPP enforces more discipline in seeing a project succeed. Governments have to make sure that the projects chosen are not an unnecessary burden and will generate growth, while private capital will ensure that projects stay on track.”

Private institutions that could be a source of funding would include banks. But they remain cautious bout investing in emerging markets.

Observers such as Simpfendorfer feel that Beijing’s global trade strategy offers them a “window of opportunity” to export their talent, products and expertise to developing countries that need it.

“The Belt and Road Initiative allows China to set the standard in the region,” Lai says. “Once they have a reasonable amount of market share, it allows them to influence the standards.”

“For example, if a country adopts Chinese railway technology, they will need upgrades that conform to the standard set by the Chinese. Besides opening up new market opportunities, it also creates natural customer retention.”

This could also lend itself to a sustainable capital flow and return on investment for China.

“The initiative does afford great opportunities for banks,” Lai concludes. “However, we are looking at a basket of countries with very different stages of development. So, it’s about finding a good fit.”