Belt & Road Quo Vadis?

BELT AND ROAD – QUO VADIS?

China’s march into port investments around the globe is slowing. Andrew Penfold identifi es the problems, fall-out and potential for others to step in

China’s overseas infrastructure investment programme – the ‘Belt and Road Initiative’ (BRI) – has been one of the major drivers of port investment since it was initiated in 2013. Various estimates place the commitments of the Chinese state to the BRI at up to USD1.5-2tn by 2021. The overall identifi ed investments since 2013 are summarised in Figure 1. Given the role of the Chinese government it is not really possible to diff erentiate between BRI initiatives and more ‘commercial’ investments. Overall, the commitment is massive.

Today’s reality is, however, that the Chinese economy now looks much less impressive than it did as recently as two years ago, what does this mean for port investments? In addition, the attitude of many countries to inward Chinese investments is experiencing major change.

Within the total expenditure the primary focus has been on energy related projects, but the port sector has also been a major beneficiary of China’s largesse. To date, some 17 port projects have been reliant – to varying degrees – on Chinese financing to secure construction. In addition, the BRI has focused on major infrastructure investments that will support port developments such as rail links and economic development zones. These projects are summarised in Table 1.

The Belt and Road Initiative (BRI) has come in for additional severe criticism lately. AidData’s newly released report highlights a tranche of China’s overseas lending worth USD843bn with this including some USD385bn of ‘un- and under-reported debt’. This begs the question, can this be sustainable?

A CRISIS WAITING TO HAPPEN?

The massive expansion of the Chinese economy has permitted these huge overseas investments. Indeed, export volumes have held-up in the past year, with the problems basically domestically focused. The sheer level of funds flowing out from China has proved irresistible to many Developing World governments, but it hasn’t been plain sailing in most projects. Structural difficulties beset many of these investments.

Today, the situation in China is now looking much weaker and there is a real danger of a financial crisis based on a property Ponzi scheme and worsening political pressures – particularly sabre rattling over Taiwan – compounded by repeated unrealistic Covid responses. Furthermore, there are difficulties with a lack of transparency with regard to debt crossholdings. The opaque nature of these arrangements suggests the debt position could be much worse than admitted.

China was facing a much more uncertain economic outlook even ahead of high inflation and rising interest rates. There are mounting concerns of an impending crisis and it is difficult to see how the BRI can weather such difficulties should they worsen dramatically.

In the longer-term, China is under pressure from a declining and aging population and classic development difficulties as it tries to emerge from the ‘middle income trap’ that besets even much more open economies. How can China continue to fund BRI projects, when under these pressures? How does this impact the BRI programme and – specifically – key port developments?

Already heavily indebted countries are struggling to meet loan repayments as many of the initiative’s high-profile projects have failed to yield commercial returns. If these projects are to mature and stand a chance of reaching genuine profitability, then China is on the hook for billions of dollars of rescue loans. The question is whether the Chinese economy will be able to make these commitments?

BRI – GOOD PROJECTS?

A brief look at the port projects that were at the centre of the Chinese funding initiatives confirm that only Piraeus and possibly elements of the purchase of Noatum Ports can be said to have been an unqualified success. In Piraeus, volumes have accelerated sharply with the port playing a central role in regional transshipment. Other projects such as Kumport and Haifa are in a much earlier stage of development and the position remains unclear, but the strategic initiative is apparent.

Elsewhere, the position has been much less positive. The focus of development has been on Asia and East Africa, with some investments aimed at securing raw material supply for China and others clearly focused on a more ‘strategic’ motivation. Some of these projects have been hawked to investors for a long time and have been found to be unbankable in straightforward commercial terms. The port of Gwadar in Pakistan is an example of this. The project was first brought forward for development in the late 1990s, as part of an initiative to boost Pakistan’s development and provide a gateway to the north. Although demand was identified it was clear that the scale of investment – both for the port and supporting hinterland links – together with political risk made the project unattractive. It is difficult to see how these concerns have changed, so investment here must be for other reasons.

It should also be noted that the attitude to Chinese

8 Hambantota

port, Sri Lanka seen by many as a classic debt trap which ultimately provided China with a strategic Indian Ocean base

BRI: a tool for investment, a strategic device and now a growing source of problems? ‘‘

investment has changed with, for example, Hamburg now unclear on whether to approve Cosco’s investment in terminal operator HHLA.

Similar concerns can be identified with regard to investments in port facilities in Djibouti and also in the supporting development zones. DPW is now suing China Merchants as a result of its role with the Government of Djibouti.

Where there is a clear economic rationale for development such as in the rail link between Djibouti and Ethiopia or the standard gauge rail link from Mombasa, project completion has proved problematic with local difficulties often coming into play as projects reach the 80-90 percent completion point. There are also ongoing concerns about utilisation levels and securing adequate returns on the investments undertaken

Far more problematic has been investment in Hambantota port in Sri Lanka. The economic rationale for this development was unclear from the outset given the scale of investment in Colombo. It has come as no surprise to analysts that the Sri Lankan government has been unable to service debts on this project and the decision to commute these debts into a long term – 99-year – lease on the port in 2017 seemed inevitable. The port provides the Chinese with a major new piece of infrastructure and a strategic foothold in the region and its potential to allow a Chinese naval presence in the Indian Ocean must have been a motivating factor.

It is interesting to note that the more recent BRI push into Latin America has met with more limited success. Only Cuba and some smaller Caribbean islands have taken advantage of these funds and there is already major pushback from the US and Japan with some proposed projects. Where there is a clear economic rationale, such as Cosco’s investments in Colon at the Caribbean end of the Panama Canal, investment has been on a more stable basis, with little questioning of motivation although one Panama project was cancelled after construction had begun following US pressures.

THE DEBT TRAP: WHO’S IN?

Much attention has been directed at the co-called ‘debt trap’ aspect of the BRI. This is the accusation that China uses Belt and Road as part of a manipulative global strategy, funding major infrastructure projects in developing nations with unsustainable loans, then using the debt to gain leverage over those governments.

Viewed from the perspective of as recently as 2019 this seemed like a clear concern. However, from the current viewpoint it looks much more complex. With governments unable to service loans – and the position is weakening rapidly at the global level as we head into recession and inflation bites – China is faced with difficult decisions. Does it pour further resources into these money pits in the hope of some strategic (not financial) return or do they cut their losses? Also, will the Chinese government actually have the resources to provide these investments given the mounting economic and political difficulties?

This could well be another manifestation of the risky nature of international lending with local interests often misusing funds as was seen in Africa and Latin America in the 1980s and 1990s. This overexuberance contributes to the boom-and-bust cycle. This time there could well be a significant political overlay.

Does this, in turn, mean that opportunities will exist for commercial investors to step in with funding for shares of these projects? A careful case-by-case assessment is required but the position now looks quite different than from the preCovid perspective. However, some of these ports have been completed and some are still under construction. In both cases sunk costs will not be recoverable. As such, there may be real opportunities for the canny (and courageous) investor.

8 Figure 1: China’s

Belt and Road total investments since 2013 (US$bn)

Project Location

Port Investments

Aktau Port Kazakhstan Colombo South Harbour Sri Lanka Dawei Port Myanmar Doraleh Multi-Purpose Port Djibouti Grand Faw Port Iraq Gwadar Port Pakistan Haifa Port Israel Hambantota Port Sri Lanka Kalifa Port Terminal 2 UAE Kuala Tanjung Port Indonesia Kumport Terminal Turkey Kyaukpyu Deepsea Tanker Port Myanmar Noatum Ports Spain Panama Colon Container Port Panama Port of Piraeus Greece Port St John’s expansion Antigua Santiago Container Terminal Cuba

Economic Investment Zones

Duqm Port Commercial Terminal Oman Kyaukpyu Special Economic Zone Myanmar Port City Colombo Sri Lanka

Port-Related Rail

Belgrade to Montenegro Bar Rail Montenegro Benguela Railway Angola Djibouti to Ethiopia Railway Djibouti/Ethiopia Khartoum Port Sudan Railway Sudan Lagos to Calabar Railway Nigeria Lagos to Kano Railway Nigeria Mombasa Nairobi Rail Link Kenya Saudi Landbridge Saudi Arabia

8 Table 1: Select

Major Port and Port/Related BRI Investment Projects

Source: Belt and Road Initiative