The Belt and Road Newsletter Edition 4

Edition 4

September 2019

The Belt and Road Spotlight on Africa

Belt and Road in Africa: More seats at the table Investment in Africa’s infrastructure: From funding gap to investment opportunities Belt and Road in Africa: East Africa’s early advantage

Edition 4

Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04 Belt and Road in Africa: More seats at the table

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Investment in Africa’s infrastructure: . . . . . . . . . . . . . . . . . . 08 From funding gap to investment opportunities Belt and Road outlook — . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09 a new world order for trade?

Belt and Road in Africa: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 East Africa’s early advantage Public-private partnerships (PPPs): . . . . . . . . . . . . . . . . . . . . 16 A route to reducing the African infrastructure gap?

Mitigating risk in Belt and Road markets . . . . . . . . . . . . . . . 17 News in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

September 2019

The Belt and Road

Foreword Belt and Road is already making a real difference to economies and livelihoods in Africa. The initiative is not just about completing road and sea trade routes – but to support the vision for globalisation, innovation and co-operation – of which Africa stands to benefit over the long term.

Africa’s demographics are changing fast. Already home to 1.3 billion people, the continent has the world’s highest rate of population growth – a population that is expected to double by 2050.

This raises great opportunity, but also significant challenges. Africa’s infrastructure gap is increasingly under the spotlight – exacerbated by the concentration of this projected population growth in urban areas. This booming urban population needs better supply chains for the delivery of food, water, electricity and transportation services. And these infrastructure needs present for new capacity and the replacement of ageing infrastructure – both are required to sustain growth of economies, population, and income levels.

Sunil Kaushal Regional CEO, Africa & Middle East, Standard Chartered

However, only half of the continent’s USD130-170 billion minimum annual infrastructure investment need is currently being met, according to African Development Bank. In many ways, the Belt and Road initiative – and its headways in Africa – couldn’t come at a more apt time.

At Standard Chartered, we believe this (increasingly-global) initiative has an important part to play in filling Africa’s infrastructure gap. And by supporting important African projects under the initiative, we are also investing in the communities that we operate in, helping them to thrive.

In this fourth edition of the Belt and Road Newsletter, we explore how the Belt and Road is already making a real difference to economies and livelihoods in Africa. Our first piece gives a thorough overview into the history and current status of Belt and Road projects in Africa.

Then our focus on East Africa highlights success stories in Africa’s Belt and Road frontier, such as the Standard Gauge Railway, East Africa’s largest ever infrastructure project.

Belt and Road has of course not been without its criticisms – often in the context of the proportion of funding stemming from state-owned Chinese entities. While the Belt and Road initiative would not be where it is today without this early-stage funding, it is now very much open to investment beyond this – presenting significant opportunities for corporates. As we explore in this edition – in particular in our illustrative piece on public-private partnerships (PPPs) – private investors have an increasingly critical role to play in Africa’s infrastructure development narrative. And with our presence across all key Belt and Road markets in Africa, we look forward to helping guide clients as they consider both the opportunities and risks involved in these kinds of project cycles.

There is no doubt that social, economic and political challenges remain in Africa.

However, it’s clear that Belt and Road here is not just about completing road and sea trade routes – but to support the vision for globalisation, innovation and co-operation – of which Africa stands to benefit over the long term.

We do hope you enjoy this newsletter, and look forward to your feedback.

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September 2019

Belt and Road in Africa: More seats at the table China’s investment into Africa long pre-dates the 2013-launch of the Belt and Road initiative. Yet its establishment has focused the spotlight on the region in recent years.

And thanks to emerging Belt and Road success stories, other countries are now also recognising the investment potential of Africa, according to Saif Malik, Standard Chartered, Regional Co-Head of Global Banking Africa and Middle East.

“China has taken a long-term view but given the huge opportunity, we’ve seen Japan, Europe and other countries repivot to position themselves to refocus on Africa,” he said.

“The Chinese investment has really helped a lot of countries move forward and now they are in a better position to open up and look at other agencies from other countries.”

Large-scale examples include the International Development Finance Corporation – established in September 2018 by the United States – which will provide USD60 billion in loans to developing nations including African countries. The European Union is also proposing an extra EUR40 billion in grants to Africa between 2021 and 2027.

Beyond the norm And as the international pace picks up, China continues to make clear just how important Africa is for its Belt and Road ambitions. In addition to notable visits to select African nations

by President Xi Jinping3, funding shows no signs of slowing.

For example, at the Forum on China-Africa Cooperation (FOCAC) in September 2018, China pledged an extra USD60 billion of investment and concessional lending to the region.

The Chinese investment has really helped a lot of countries move forward and now they are in a better position to open up and look at other agencies from other countries.

https://www.nytimes.com/2018/10/14/world/asia/donald-trump-foreign-aid-bill.html https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-factsheet-africa-europe_en.pdf 3 https://www.washingtonpost.com/news/monkey-cage/wp/2018/07/24/xi-jinping-is-visiting-africa-this-week-heres-why-china-is-such-a-popular-developmentpartner/?noredirect=on 1 2

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The Belt and Road

Moreover, the Africa spotlight is now shining beyond the markets that traditionally received such investment.

“China has been one of the earliest, strategic investors in Africa. In the initial stages they were investing heavily in countries like Nigeria and Angola because it was mainly a commodity play, but over the last three to four years it has widened to include Belt and Road projects and to cover all of Africa,” explained Nimrita Bedi, Standard Chartered, Head, Leveraged & Structured Solutions, Africa and Regional Head, Corporate Finance, Africa and Middle East.

Building foundations A precise figure for the value of Belt and Road projects in Africa is difficult to ascertain. In part this is because much of the investment has not been specifically designated ‘Belt and Road’. China’s investment since 2013 has tended to focus on large infrastructure projects that encourage better trading links. Examples include the Standard Gauge Railway (SGR) in Kenya, which when fully completed will create a transport link between the

China has been one of the earliest, strategic investors in Africa. In the initial stages they were investing heavily in countries like Nigeria and Angola because it was mainly a commodity play, but over the last three to four years it has widened to include Belt and Road projects and to cover all of Africa.

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Kenyan seaport of Mombasa and Malaba, on the border near Uganda. Awarded to the China Road and Bridge Corporation, this is East Africa’s largest infrastructure project. The first phase between Mombasa and Kenya’s capital Nairobi was completed in June 2017, at a cost of USD3.2 billion.4 Like many of the biggest projects under Belt and Road in Africa and elsewhere, the SGR has been organised and funded at a government-to-government (G2G) level. One consequence of this approach is that projects have not always been structured and costed on a commercially sustainable basis. This is one of the reasons why debt sustainability is now a major concern in the region.

China’s heavy investment means it accounts for a large proportion of external debt in Africa: 40 per cent of Angola’s, 30 per cent Ethiopia’s, 28 per cent of Zambia’s and 20 per cent of Kenya’s.5 Unsurprisingly, the lack of financial viability of some projects and the struggle of governments to pay back the loans has led to some highly public criticism of Belt and Road projects in Africa.

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September 2019

However, China has shown a willingness to address the problem, with President Xi promising to grant either debt relief or restructuring at 2018’s FOCAC, which Standard Chartered believes should limit contagion and prevent systemic fallout for now.6

Some progress has already been made in this area, with Kenya opening East Africa’s largest solar park in November 2018. The 85-hectare plant was built by China Jiangxi International (K) Limited with a loan from ExportImport Bank of China.9

Powering up private investment

Chinese loans have also financed several renewable energy projects in other parts of Africa. Prime examples include projects to develop wind farms in Ethiopia, solar power in South Africa and hydroelectric power in Uganda and Cameroon.10

And critically for the long-term success of the Belt and Road in Africa, there is an increasing shift away from G2G funding towards projects financed through publicprivate partnerships (PPPs), according to Alan Sproule, Standard Chartered, Executive Principal, Project and Export Finance.

“Chinese banks and sponsors are being encouraged to seek commercially-viable projects and to incorporate some level of PPP structure to infrastructure projects. Given the pressure on many countries just to service existing debt, PPP is really the way forward for new projects,” he said.

In turn, this more commercial approach is increasingly attracting non-Chinese companies that understand the opportunity presented by Belt and Road in Africa.

As well as providing a more sustainable approach to infrastructure development, the shift towards PPP reflects the efforts of African governments to establish legislation and promote this type of financing in recent years.

Between 2004 and 2017, some 30 African countries have adopted PPP laws7 as they seek to attract more foreign investment for infrastructure projects.

Promoting sustainability While transport and energy infrastructure projects will continue to make up the bulk of new opportunities, China investment is beginning to broaden into new areas. This will include green and sustainable schemes, following President Xi’s commitment to invest in 50 projects focusing on fighting climate change, desertification and wildlife protection in his opening speech at FOCAC.8

There is significant scope for the Belt and Road initiative to help Africa further embrace sustainable finance and address the continent’s energy problem.

African countries have also made inroads into sustainable finance for some time now. South Africa and Nigeria, for example, have both seen the issuance of first-of-their-kind green bonds in recent years. The former has also taken steps to fund the development of efficient water and waste management projects, among other green initiatives.11 But, with as many as 600 million people still lacking access to electricity across Africa, there is significant scope for the Belt and Road initiative to help Africa further embrace sustainable finance and address the continent’s energy problem.

From building roads that connect countries to developing the infrastructure that will create a greener future, China and increasingly international companies are seizing the opportunities offered by the Belt and Road in Africa.

https://www.inkstonenews.com/politics/its-popular-travelers-kenyas-chinese-built-railway-massive-white-elephant/article/3019761 5 Standard Chartered, Belt and Road – Making its presence felt, October 2018 6 Standard Chartered, Belt and Road – Making its presence felt, October 2018 7 http://blogs.worldbank.org/ppps/ ppp-laws-africa-confusing-or-clarifying 8 https://www.reuters.com/article/us-china-africa/chinas-xi-says-funds-for-africa-not-for-vanity-projects-idUSKCN1LJ0C4 9 https://www.constructionkenya.com/2747/china-garissa-kenya-solar-plant/ 10 https://www.ictsd.org/bridges-news/bridges-africa/news/crossing-rivers-feelingstones-the-rise-of-chinese-infrastructure 11 https://www.climatebonds.net/files/files/CBI-PolicyRoundup_2017%20Final%203.pdf 12 https://www.devex.com/ news/opinion-financing-africa-s-green-energy-revolution-92396 4

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The Belt and Road

Investment in Africa’s infrastructure: From funding gap to investment opportunities The region’s infrastructure funding gap persists1 Africa’s annual infrastructure requirements

Estimated financing gap

USD130 billion to USD170 billion

USD68 billion to USD108 billion

Closing the gap – an attractive investment opportunity Africa is a huge market opportunity2 • 52 cities with 1 million+ populations • Urban populations growing by 50% to 2030 • Rising middle class purchasing power • World’s largest workforce in ten years • Three of the world’s five fastest-growing economies in Africa3

Infrastructure is an attractive investment class4 • Cash generative, stable income distributions • Revenues often inflation-linked • Resilient and stable during economic downturns (with exceptions) • High barriers to entry for competitors • Plus: participation in sectors needing funding can lead to social and economic benefits5

Africa infrastructure investment presents heightened risks and challenges1,2

Public sector • Policy uncertainty • Economic deficits and stabilisation

Regulations • Challenging regulatory environments • Lack of common contractual forms between markets

Sector development • Shortage of technical skills • Loose project pipelines • Lack of feasibility studies

Successful investors will2: • Expectations reflective Have a of the African environment certain investor • Persistence and resilience mindset • Long-term view of success and • Aligned risk tolerance outlook • Robust local market knowledge • End-to-end view of projects • Ensure community engagement occurs as a priority

Follow project develoment best practices

Financing • Longer project durations • Cost overruns • Currency mismatches

• Accommodate shifts in timing • Build relationships with governments • Co-fund feasibility studies • Work with the right combinations of partners • Maintain precise documentation • Set clear rules of engagement

Africa Development Bank Group. African Economic Outlook. 2018 2 BCG and Africa Finance Corporation. Infrastructure Financing in Sub-Saharan Africa, Best Practices from Ten Years in the Field. 2017 3 Nasdaq. The 5 fastest growing economies in the world. 27 June 2019 (Guyana, Ethiopia, Rwanda, Bangladesh, India) 4 FT Advisor. Infrastructure CPD course – guide to investing in infrastructure. 2017 5 EY. Infrastructure Investments, An attractive option to help deliver a prosperous and sustainable economy. 2015 1

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September 2019

Belt and Road outlook — a new world order for trade?

A myriad of predictions about the future of the Belt and Road continue to be debated, yet one thing is beyond dispute — Belt and Road isn’t going to disappear.

The National People’s Congress incorporated a reference to the goal of the Belt and Road as creating a “shared destiny of mankind” into its national constitution in April 2018. China’s President Xi Jinping has also made the Belt and Road a central pillar of his long-term foreign policy.

And beyond China, more multinationals are committing support and resources to the initiative. This is in large part because Belt and Road is helping to fill longstanding infrastructure gaps in developing markets, unleashing a new wave of opportunity and growth.

In March 2019, nearly six years into the Belt and Road …with

China’s 2018 foreign trade

173

125

113

302

10%

trade and other economic agreements executed…

countries

industrial and trade zones created

THOUSAND jobs created

growth, boosted by commerce with Belt and Road countries

Sources: Telegraph1, Xinhuanet2

1 2

The Telegraph. Belt and Road projects: past, present and future. 2 May 2019. https://www.telegraph.co.uk/china-watch/business/belt-road-projects-list/ Xinhuanet. China’s foreign trade hits historic high in 2018. 14 Jan 2019. http://www.xinhuanet.com/english/2019-01/14/c_137742386.htm

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Expectations of the Belt and Road are also high. A 2018 survey3 of 26 central banks in Belt and Road nations found that 92 per cent believed the initiative will boost economic growth by as much as 5.5 percentage points over the next five years.

Infrastructure investments along Belt and Road routes are accelerating growth and laying the foundations for economies to flourish, particularly in nations struggling with infrastructure deficits. As McKinsey noted in its 2016 ‘Bridging Global Infrastructure Gaps’ report,4 boosting infrastructure investment “in line with economic needs” could add between 0.6 to 1.3 per cent to global GDP through 2026 – and create millions of jobs.

Looming challenges Yet numerous challenges lie ahead. Belt and Road projects have not been uniformly successful, at least in part

because in the rush to fulfil President Xi’s vision, many have been hastily approved without proper coordination.

“Some may never get built; others have been plagued by construction setbacks and spiralling costs,” Bloomberg’s editorial board noted in a November 2018 article.5 “Many are unlikely ever to make money.”

There is lingering international scepticism, particularly from the West, but increasingly among certain Belt and Roadcorridor nations as well. The Chinese takeover of Sri Lanka’s Hambantota Port has fanned allegations of ‘debt diplomacy’, and the railway through Laos linking southern China to Thailand is becoming so expensive that it could equal a third of the host country’s entire GDP, raising concerns about burden it could place on the Lao economy.

And despite growing international involvement, inclusiveness remains a common bugbear – particularly on Chinese-funded projects, as shown below.

Contractors on Chinese-funded B&R projects

89% Chinese

7.6%

3.4%

from host countries

overseas firms

Contractors on B&R projects financed by multilateral development banks

29%

Chinese

40.8% from host countries

30.2% overseas firms

Source: Reconnecting Asia6

Central Banking. A route to economic growth – The Belt and Road Initiative 2018 survey. 2018. https://www.centralbanking.com/central-banks/economics/3456321/ a-route-to-economic-growth-the-belt-and-road-initiative-2018-survey 4 McKinsey. Bridging global infrastructure gaps. 2016. https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/ Our%20Insights/Bridging%20global%20infrastructure%20gaps/Bridging-Global-Infrastructure-Gaps-Full-report-June-2016.ashx 5 Bloomberg. A new direction for China’s Belt and Road. 2018. https://www.bloomberg.com/opinion/articles/2018-11-01/belt-and-road-infrastructure-plan-needs-a-new-direction 6 Reconnecting Asia. China’s Belt and Road Initiative: Five Years Later. 2018. https://www.csis.org/analysis/chinas-belt-and-road-initiative-five-years-later-0 3

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Then there are the unpredictable trade hostilities between China and the United States. Tariffs imposed on Chinese exports to the United States have already contributed to the slowest quarterly economic growth in China for a decade.7 And the threat of further tariffs is increasing the pressure on the government in China to focus on the domestic economy instead of international concerns.

Meanwhile, the United States has also formed its own development initiative with Australia and Japan with similar goals to the Belt and Road.

“Protectionist rhetoric…is now more prominent in an increasingly polarised world,” Standard Chartered wrote in a November 2018 report.8 “Populist nationalist agendas are driving the increases in trade-related tariffs as centreleft and centre-right politics move to the extremes.”

If this inward-looking trend deepens, more Belt and Road projects could face the increased scrutiny of host governments.

Overstated impact While the implications of the trade war are in the spotlight, when considered in context, the potential impact of tariffs on the Belt and Road is not necessarily bleak.

In a November 2018 report,9 Standard Chartered noted that trade between the United States and China accounts for between just 2 and 3 per cent of global trade flows.

And markets vulnerable to the impact of US tariffs – such as Vietnam, Malaysia, Taiwan and South Korea – are conversely likely to be among the economies that would gain most from the associated export trade diversion, according to the Bank.

China itself may also react to a trade war by expanding its trading links with other countries, including

September 2019

those in Africa. China has signed Memorandum of Understandings on Belt and Road projects with 37 African nations.10 And in 2018, China’s imports from Africa grew 31 per cent to USD99.28 billion and exports to the continent rose 11 per cent to USD104.91 billion.11

The path forward China is staking a lot of political and economic capital on the success of the Belt and Road, and as a result is unlikely to let problems fester into outright failure.

The growing challenges outlined above will require China to re-think its strategy and “better align itself with prevailing international standards in areas such as cross-border debt and procurement policies”, Standard Chartered’s chief economist David Mann wrote in a 2018 report12 on the annual International Monetary Fund and World Bank meetings.

While the implications of the trade war are in the spotlight, when considered in context, the potential impact of tariffs on the Belt and Road is not necessarily bleak.

Opening tenders to non-Chinese companies and employing more local workers could cut costs, build goodwill and deflect accusations of bias. Providing greater transparency, consulting civil-society groups, and carrying out better social and environmental assessments of projects might delay approvals, but might head off future problems.

Financial Times. China’s economy grows at slowest rate in nearly 30 years. 15 July 2019. https://www.ft.com/content/73f06b8a-a696-11e9-984c-fac8325aaa04 Standard Chartered. Trade wars and technology: A new era for trade finance. 2018. https://www.sc.com/en/feature/trade-wars-and-technology-a-new-era-for-tradefinance/ 9 Standard Chartered. Trade wars and technology: A new era for trade finance. 2018. https://www.sc.com/en/feature/trade-wars-and-technology-a-new-era-for-tradefinance/ 10 China Daily. China signs MOUs with 37 African countries, AU on B&R development. 07 September 2018. http://www.chinadaily.com.cn/a/201809/07/ WS5b9278e8a31033b4f4654e77.html 11 Ministry of Commerce People’s Republic of China. Statistics on China-Africa Trade in 2018. 2019. http://english.mofcom.gov.cn/article/statistic/lanmubb/ AsiaAfrica/201901/20190102831255.shtml 12 Standard Chartered. Growth in the face of headwinds. 2018. https://issuu.com/stanchart/docs/sc_imf_booklet_v5_sp/4 7 8

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“The Belt and Road needn’t pose a threat and shouldn’t be opposed on principle,” the Bloomberg editorial board wrote in 2018.13 “Quite the opposite: If China’s investment and expertise succeed in boosting development in poor or unstable regions, the United States and other developed nations could benefit too.”

If China’s investment and expertise succeed in boosting development in poor or unstable regions, the United States and other developed nations could benefit too.

At its current pace, for example, the World Bank estimates that Belt and Road infrastructure will cut shipping times for both Belt and Road and non-Belt and Road countries, with the largest gains in East and South Asia, and along the China-Central Asia-West Asia corridor. Those improvements will cut trade costs by as much as 2.8 per cent for Belt and Road countries, the Bank forecasts.14 Regions such as South-east Asia also stand on the cusp of reaping major benefits, triggered not just by the Belt and Road but also by tariff-driven manufacturing relocations. The long-term potential rewards of Belt and Road projects may ultimately outweigh the simmering disquiet among governments, as seen in the progress made in countries such as Malaysia15 and Thailand.16

Nations from Italy and Germany to Laos and Djibouti have thrown their hats into the Belt and Road ring, so the US-Australia-Japan development bloc is unlikely to be able to match the initiative for sheer scale or financial muscle. Besides, if the Belt and Road continues to expand – even at a slower pace – the opposition of the United States may become increasingly irrelevant as more and more nations reap the rewards of greater investment and expanding markets.

“Market focus on setbacks to the Belt and Road initiative, especially on the issue of debt sustainability, increased,” Standard Chartered analysts wrote in a report.17 “However, we think the market is underappreciating the extent to which underlying trade and investment between China and its Belt and Road partner countries have flourished since the launch of the Belt and Road.”

We think the market is underappreciating the extent to which underlying trade and investment between China and its Belt and Road partner countries have flourished since the launch of the Belt and Road.

This content was written and produced by Bloomberg Media Studios and was originally published on bloomberg.com on 17th January 2019.

Bloomberg. A New Direction for China’s Belt and Road. 2018. https://www.bloombergquint.com/view/belt-and-road-infrastructure-plan-needs-a-new-direction World Bank. How much will the Belt and Road initiative reduce trade costs?. 2018. http://documents.worldbank.org/curated/en/592771539630482582/pdf/ WPS8614.pdf 15 Financial Times. Malaysia to resume China-built Belt and Road rail project. 12 April 2019. https://www.ft.com/content/8bc8cb02-5ceb-11e9-9dde-7aedca0a081a 16 Nikkei Asia. Thailand pushes China’s Belt and Road despite differing visions. 2 May 2019. https://asia.nikkei.com/Spotlight/Belt-and-Road/Thailand-pushes-China-sBelt-and-Road-despite-differing-visions 17 Standard Chartered. Belt and Road: making its presence felt. 2018. https://av.sc.com/corp-en/content/docs/2018-11-21-Insights-Kelvin-Lau-BR-FINAL_SpecialReport-Belt-and-Road.pdf 13 14

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Belt and Road in Africa: East Africa’s early advantage East Africa is somewhat of a cornerstone of the Belt and Road in Africa. The region has emerged as the continent’s biggest recipient of Chinese trade and investment since Belt and Road launched in 2013.

And it’s the success and scale of China-led projects in this region in particular that is attracting greater international participation in Belt and Road.

“East Africa is the gateway for Belt and Road into the rest of Africa,” said Saif Malik, Standard Chartered, Managing Director and Head of Global Banking Africa. “It is a conduit that will allow development — from infrastructure to digital to healthcare — to go into the rest of the region,” he added.

The acceleration of Chinese investment in East Africa has been remarkable. The turnover of China’s projects in the East African economies of Ethiopia, Tanzania, Kenya, Uganda and Djibouti was USD46.6 billion between 2013 and 2016 (up from USD15.6 billion in 2009-2012)1. And while admittedly starting from a low base, international investment in East African Belt and Road projects is now also growing.2 1 2

East Africa is a conduit that will allow development — from infrastructure to digital to healthcare — to go into the rest of the region.

The sheer scale of Belt and Road projects in East Africa is reflected in some of the flagship projects, such as the Kenyan Standard Gauge Railway (SGR). Built at a cost of USD3.2 billion,3 China Road and Bridge Corporation (CRBC) was awarded the contract for the 472-kilometre rail link – East Africa’s largest ever infrastructure project. While in Uganda, PowerChina and Sinohydro are constructing a USD1.7 billion 600-megawatt hydropower dam. When completed, the Karuma Hydro Power Project will be the largest dam in Africa and the biggest power generation facility in Uganda.4

Standard Chartered, China-Africa: Looking to Africa along the OBOR, May 2018 EY. Africa attractiveness: turning tides. 2018

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The Belt and Road

Essential infrastructure China has undoubtedly been the main financier of Belt and Road projects thus far. And as the recipient of so much investment under the initiative, East African countries have therefore some of the highest debt exposure to China in the region. Rising concerns about debt sustainability have led a number of East African countries to seek to renegotiate the terms. For example, in September 2018 Ethiopia secured an agreement with China to restructure some of its loans. The deal included extending the maturity of a USD4 billion loan for a railway project by 20 years.5 Despite the concerns, there is a recognition that Chinese investment has been positive for the region. In a recent report, the African Development Bank doubted whether many of the infrastructure projects in East Africa would have taken place without Chinese engagement and financing, “particularly given the apparent reluctance of the IFIs [International Financial Institutions] to support further infrastructure development”.6 The issue of high debt levels has to be balanced against the longer-term benefits of building vital infrastructure, according to Nimrita Bedi, Standard Chartered, Head, Leveraged & Structured Solutions, Africa and Regional Head, Corporate Finance, Africa and Middle East.

“China is building roads, rails, airports – necessary pieces of infrastructure that are needed and that have been built because China was willing to fund these projects,” she said.

Diversification dividend And it’s important to recognise that China’s investment into East Africa is not just a quirk of cartography, there are also strategic and economic factors driving this attention.

For a start, countries in this part of Africa have never been in a position to be overly reliant on a single commodity, explained Alan Sproule, Standard Chartered, Executive Principal, Project & Export Finance.

“Unlike countries which rely on oil revenues, East African countries have needed to diversify their economies – they are more open and have realised the benefits of infrastructure and outside investment earlier,” he says.

Unlike countries which rely on oil revenues, East African countries have needed to diversify their economies – they are more open and have realised the benefits of infrastructure and outside investment earlier.

Export data for East and West Africa’s biggest economies gives a sense of that diversification divide. Kenya’s topthree exports in 2016 were transport (17.5 per cent), ICT (16.03 per cent) and tea (12.04 per cent) compared with Nigeria’s which were petroleum oils and crude (68.53 per cent), petroleum gases (12.67 per cent) and transport (4.15 per cent).7 China has also been able to take advantage of the number of East African economic corridors that seek to speed up development and improve inter-regional integration, explained Sproule. These include the Northern Corridor Integration Projects (NCIP) between Kenya, Rwanda, South Sudan and Uganda of which the SGR is a key part; the Central Corridor Trade Route that seeks to improve the road, rail and inland waterway links between Central and East Africa; and the LAPSSET Corridor Program – an infrastructure project bringing together Kenya, Ethiopia and South Sudan.

https://www.scmp.com/news/china/diplomacy/article/3019603/kenyas-chinese-built-railway-hit-travellers-safari-line https://www.compelo.com/energy/projects/karuma-hydropower-project-uganda/ 5 https://www.cnbc.com/2018/09/06/reuters-america-update-1-ethiopia-pm-says-china-will-restructure-railway-loan.html 6 https://www.afdb.org/uploads/tx_llafdbpapers/Modelling_the_economic_impact_of_the_China_Belt_and_Road_Initiative_on_East_Africa.pdf 7 http://atlas.cid.harvard.edu/ 3 4

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Beyond infrastructure East Africa is also undergoing economic and demographic changes that are priming it for strong future growth – much like China’s own development over recent decades. With an average GDP growth rate of 6.7 per cent between 2013 and 20178 – double the African average – and with expected growth of 6.4 per cent in 2019, according to the United Nations,9 East Africa is one of the fastest growing regions in the world. This success is giving rise to an expanding consumer class which in turn is creating opportunities for China and other countries to export products and services to meet the demand from this growing segment. One of the most exciting areas of this is fintech, according Malik.

“We’re seeing huge interest around digitisation of financial services, it’s a huge space for innovation.”

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Digital connectivity across East Africa — and the rest of the region — will be boosted by the 13,000 kilometre PEACE submarine cable, which will run from Pakistan to Kenya, via Djibouti10 and is expected to be available for commercial use by 2020.11 The cable will help meet Africa’s unprecedented internet demand, which saw usage across the continent rise by 20 per cent in 2018 alone.12 With strong economic growth, open economies and favourable demographics, East Africa is a natural jumping off point for international investment to access the rest of the continent, concluded Malik.

We’re seeing huge interest around digitisation of financial services, it’s a huge space for innovation.

https://www.uneca.org/stories/east-africa-fastest-growing-region-africa-people-leading-longer-and-healthier-lives http://repository.uneca.org/bitstream/handle/10855/41804/b11928190.pdf?sequence=1 10 Standard Chartered B&R Africa overview V5 video 11 https://www.submarinenetworks.com/en/systems/asia-europe-africa/peace/peace-submarine-cable-project-perfectly-interpreting-china-manufacturing-global-quality 12 Standard Chartered B&R Africa overview V5 video 8

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Public-private partnerships (PPPs): A route to reducing the African infrastructure gap?

Mind the gap

USD68 billion to Africa’s estimated infrastructure financing gap: USD108 billion1

PPPs’ progression is helping plug the gap Increasing private participation in Sub-Saharan Africa’s infrastructure2 • At USD7.7 billion in 2018, private investment almost tripled from 2017 • The largest amount since 2014

Strengthening legal framework3

Deals are being done2

• ~30 African countries adopted PPP laws between 2004 and 2017

• 21 South African renewable energy sector projects in 2018

• Only 10 African countries still entirely without a PPP framework

• USD1.4 billion Cameroon hydropower plant project in 2018

PPPs present an attractive opportunity for private investors Also provides ‘profit with a purpose’ 5

Financial opportunities 4

Increases business confidence

Diversification of portfolios High returns

Draws further investment Fosters innovation and productivity

Inflation-hedging Reduced currency risk via USD dominated projects

Ultimately supports long-term growth and prosperity

Despite progress, there’s further potential for PPPs to plug the gap5 Sources of investment in African infrastructure (2012 - 2016) The private sector makes a relatively small contribution to total Africa infrastructure financing 1. African governments 2. Donors (ICA members) 3. China 4. Private sector 5. Arab countries 6. MDBs and other bilaterals

27%

Private investors should look for projects with these key characteristics6: • Central budget authority approval on long-term financial implications

6 55 6

• Project assessed alongside other public investments

44

40%

11

33

15% 8% 6% 3%

Note: ICA refers to the Infrastructure Consortium for Africa and MDBs refer to Multilateral Development Banks

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Success breeds success

• Project is justified against a number of criteria: – – – – –

Socioeconomic Fiscal affordability Financial viability Risk assessments Market assessments

Africa Development Bank Group. African Economic Outlook. 2018 2 World Bank Group. Private Participation in Infrastructure (PPI) Annual Report 2018. 2018 World Bank Group. PPP laws in Africa: Confusing or clarifying?. 2018 4 Mercer. Investment in Africa infrastructure, challenges and opportunities. 2018 5 Deloitte Insights. If you want to prosper, consider building roads. 2019 6 World Bank Group, Benchmarking Public-Private Partnerships Procurement 2017. 2016 1 3

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Mitigating risk in Belt and Road markets Precautionary steps to mitigate risk are a key part of every investment. This is crucial in markets covered by the Belt and Road initiative, where many countries1 have regulatory and enforcement frameworks that are not yet fully developed.

The kaleidoscope of risk

Occasional security threats, including the risk of kidnap for ransom, have emerged in some markets, while in others, the chances of legal and commercial disputes are high. There can also be high revenue and liquidity risks. For example, developing a railway in a country where the government imposes ticket-price controls may make it difficult to generate returns for investors from passenger fares. At the same time, a lack of long-term debt markets can be an obstacle to raising investment funds in a local currency.

Investment risks along the B&R vary in magnitude and character according to the location and nature of a project. In some countries, geopolitical risks have been evident, with internal or international political disputes leading to delays or even cancellation of projects. Indeed, some of the largest proposed projects along the B&R, backed by China’s state-owned enterprises (SOEs), have run into trouble2 through corporate operational risks linked to local politics.

In markets with limited regulatory capacity, the onus to identify and mitigate environmental and social risks can then end up lying with investors and contractors.

The very nature of B&R, with its focus on emerging markets, implies higher risk than in developed economies. These markets have so far been neglected, in part because of their perceived risks. However, with appropriate preparation and local knowledge, risk can be mitigated, the chances of a return on investment can be maximized, and opportunities available along the B&R can be seized.

1 2

South China Morning Post. Belt and road deals conjure up legal risks for China’s lenders. 13 May 2017.

EY. Navigating the belt and road. 2015.

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In markets with limited regulatory capacity, the onus to identify and mitigate environmental and social risks can then end up lying with investors and contractors.3 Along the railway currently being built through Laos to China, contractors have tried to demonstrate environmental responsibility by building a fence that will keep wild elephants from crossing the rails. However, the project’s environmental performance still generated criticism after wastewater runoff from tunnel construction polluted a river at Laos’s main eco-tourism resort.

On the community side, cultural sensitivities of local populations across B&R corridors pose another challenge, with many countries home to multiple ethnic groups with different languages and customs. Compensatory gestures that may please people in one area might cause offence elsewhere. Managing labour relations and safety issues can become more complex when such mixed cultures are involved, while bringing large numbers of workers into rural areas may be perceived as engendering particular risks for the local population and the reputation of a company.

Risk levels in Belt and Road countries OECD measure of country risk in 78 countries involved in the Belt and Road initiative (0 = lowest country risk, 7 = highest country risk) BANGLADESH

Country credit ratings 7 B&R average MSCI EM average 2 N/A Source: OECD, FT Research

Divide and conquer risk Mitigation measures can be applied to safeguard investments against many of these problems. Banks and legal firms with local networks and experience can help arrange financing and risk insurance, advise on project selection and controls, and provide various riskmanagement services.

Beyond this, certain cases can require specific expertise.

Professional security advice is essential in certain areas of particular countries, and with situations often proving fluid, the ability to analyse and predict the security climate is also important.

Some countries may also require investment projects to make contributions to state environmental protection funds or to fund offset areas4 for biodiversity conservation, so local experience in environmental and social mitigation programmes can make a huge difference. Projects with a large environmental footprint might be expected to pay compensation to local people5 in the form of infrastructure improvements, livelihood training, cash or even physical resettlement. Companies that enter into such projects need to be aware of the scope of commitments expected, and this requires exhaustive enquiries on the ground.

Asian Development Bank. Environmental Impact Assessment for Developing Countries in Asia. 1997.

WWF. WWF and greening the Belt and Road Initiative. 2017 5 Boell. On the road to Kyaukphyu: Issues and debates around a Myanmar Special Economic Zone. 2018 3 4

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Banks and legal firms with local networks and experience can help arrange financing and risk insurance, advise on project selection and controls, and provide various risk-management services.

When it comes to recruitment, investors typically want competent and reliable personnel in key positions. And while local partners may promise to take care of this, the expectations on either side do not always coincide.

Agencies with the ability to identify the right people for the right jobs, whether that be local talent or imported expertise, can help projects retain control of their investment.

Missed mitigation: a case study A comprehensive risk mitigation strategy can enable investment companies to avoid potentially crippling pitfalls. If such a strategy had been adopted, the Zhongda China Petrol Company may have avoided substantial losses at the Kara-Balta oil refinery in the Kyrgyz Republic.6 Zhongda invested USD430 million in the refinery, which was designed for an output capacity of 850,000 tonnes of petroleum per year.7 Construction began in 2009, but by early 2015, Zhongda was only able to source enough crude oil to refine less than 6 per cent of the plant’s capacity.

Zhongda encountered many difficulties during the project because of environmental concerns and poor relations with local communities.8 However, its main problem stemmed from the unenforceability of supply contracts, a result of inherent legal and regulatory risk in the Kyrgyz Republic at that time.

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A well-executed risk-management strategy at the outset of the project should have identified problems with local physical infrastructure and availability of facilities, along with means for alternative sourcing, or could even have tagged the project early on as being too risky to construct.

Insurance critical Conducting due diligence on environmental and social matters requires specialised knowledge of the potential effects of each kind of project and also of the response expected in a particular country. International consultancies with reputations and branch offices established in various countries can be found across the B&R, and a good banking partner should advise on reliable options in this field. Likewise, local legal counsels and recruitment agencies can add value to risk-mitigation efforts.

A comprehensive risk mitigation strategy can enable investment companies to avoid potentially crippling pitfalls.

Securing professional advice and expertise in risk management adds an expense to investment. It also increases the chances of successfully mitigating risk, and bringing the reward of strong returns if investors can identify the winners in emerging markets. As such, the hiring of an experienced international bank or business advisor with on-the-ground connections in B&R countries is similar to purchasing insurance. Some might argue it is such an elementary part of investment that it should be made obligatory.

This content was written and produced by Bloomberg Media Studios and was originally published on bloomberg.com on 20th December 2018.

Georgie Torr. Tightening the belt. 2018 Land. Central Asian ‘Characteristics’ on China’s New Silk Road: The Role of Landscape and the Politics of Infrastructure. 2017 8 Eurasianet. Kyrgyzstan suspends work at new Chinese refinery. 19 February 2014 6 7

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News in brief Belt and Road Africa fund launched A new Belt and Road Africa fund was launched in July 2019 at World Economic Forum’s Annual Meeting of the New Champions 2019 (commonly known as the ‘Summer Davos’). The fund, financed by China and endowed with USD1 billion, will focus on investments in Africa, including in infrastructure, technology, e-commerce, artificial intelligence (AI) and the resource industry in Africa.1 The fund was created at a vital time for Africa-China trade. The fund will be of interest to African businesses whose countries have signed a double tax treaty with China. Many of these countries fall along the Belt and Road trade routes.

China signs USD64 billion of deals at second Belt and Road Forum Chinese President Xi Jinping hailed deals worth USD64 billion at the Second Belt and Road Forum for International Cooperation held in Beijing in April.2 Some 5,000 delegates, including 37 heads of state, attended the forum. Chinese President Xi Jinping took the opportunity to meet with several African leaders.

During the conversations at the forum, leaders focused on addressing concerns with the Belt and Road programme relating to debt, transparency and sustainable financing.

In a joint statement,3 issued after the forum, Beijing underscored that all states in the Belt and Road initiative “are equal partners for cooperation that respects openness, transparency, inclusiveness and a level playing field”.

The document also repeatedly called for “high quality” projects and standards.

“We welcome developed countries and international investors to invest in connectivity projects in the developed nation,” read the joint communique, with an emphasis placed on promoting green development and addressing the challenges of environmental protection and climate change.

Coalition launched to promote sustainability in Belt and Road projects Over 100 international and Chinese partner institutions joined forces to integrate economic, social, and environmental considerations into the Belt and Road initiative. The Belt and Road Initiative International Green Development Coalition (BRIGC), comprising 134 partners including 26 Environmental Ministries of UN Member States, was launched during the Second Belt and Road Forum for International Cooperation in April 2019.4 The BRIGC aims to help integrate sustainable development considerations throughout the design, execution, and implementation of Belt and Road projects, across the five keys areas of policy coordination, infrastructure, trade, financial integration, and cultural exchanges.5

Silk Road Briefing. US$ 1 Billion Belt & Road Africa Fund Launched. 4 July 2019. https://www.silkroadbriefing.com/news/2019/07/04/us-1-billion-belt-road-africa-fund-launched/ Bloomberg. Xi Jinping’s second Belt and Road Forum: three key takeaways. 28 April 2019. https://www.bloomberg.com/news/articles/2019-04-28/xi-jinping-s-winsand-losses-at-his-second-belt-and-road-forum 3 Ministry of Foreign Affair. People’s Republic of China. Joint communique of the leaders’ roundtable of the 2nd Belt and Road Forum for international cooperation.

2019. https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1658766.shtml 4 United Nations Environment Programme. The Belt and Road Initiative International Green Development Coalition (BRIGC). 2019. https://www.unenvironment.org/ regions/asia-and-pacific/regional-initiatives/belt-and-road-initiative-international-green 1 2

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The coalition was formed following China’s President Xi Jinping stating that the Belt and Road initiative must be “green and sustainable”.6

Standard Chartered award wins Standard Chartered has been selected as the Best Foreign Bank for One Belt, One Road in Global Finance’s Stars of China award.

The bank has also won the following 10 categories in the 2019 Asiamoney New Silk Road Finance Awards, an increase from six awards last year, reflecting the Bank’s commitment to the Belt and Road initiative: • Best overall international bank for BRI • Best international bank for BRI in South East Asia • Best regional bank for BRI (South East Asia) • Best bank for BRI-related financing in South East Asia • Best international bank for BRI in Middle East & Africa • Best regional bank for BRI (Middle East & Africa) • Best bank for BRI-related financing in Middle East & Africa • Best international bank for BRI in South Asia • Best regional bank for BRI (South Asia) • Best bank for BRI-related financing in South Asia.

World’s first global running event along Belt and Road Eight staff athletes from across Standard Chartered’s global offices ran across 44 countries within a 90-day period, in the world’s first-ever Belt and Road-inspired global relay .

After kicking off in Hong Kong on 17 February, the race ended on 11 May in China after the Belt and Road Forum.

Commenting on the launch of the relay, Bill Winters, Group Chief Executive, said that by traversing on foot and engaging local clients and communities, the relay athletes showcase the Bank’s commitment to be the ‘one bank’ for the Belt and Road.

Jack Missin, one of the eight athletes, said that another big point of the trip was to see the effect that the Belt and Road initiative was having both economically and socially on the countries it is present.

The eight staff athletes were selected from the Bank’s diverse footprint in Asia, Africa, the Middle East, Europe and the Americas.

In 2017, Standard Chartered committed additional financing for Belt and Road projects of at least USD20 billion by 2020. Standard Chartered fulfilled this commitment in 2018, and was involved in nearly 100 Belt and Road projects across a range of products and services.

ibid Reuters. China’s Xi says Belt and Road must be green, sustainable. 26 April 2019. https://af.reuters.com/article/worldNews/idAFKCN1S2063 7 Standard Chartered. Belt and Road relay. 2019. https://www.sc.com/en/banking/belt-and-road/relay/ 5 6

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