China just announced that it may have to revisit some of the loans made to borrowers in its Belt and Road Initiative. Pakistan has informally mentioned the need to do so. Sri Lanka has just gone through a painful restructuring with China. Mozambique and Malaysia have put prospective deals on hold.
It’s no wonder. Those deals were probably not bankable in the West to begin with. Had they been economically viable, they would have been done with a combination of equity put in by foreign investors, with the rest of the financing secured by bonds for which those investors would have been responsible.
The Chinese stepped in to what they viewed was a vacuum, sensing a demand, a business opportunity to boost their GDP, and to extend their hegemony into new areas beyond their borders . The Chinese pounced, putting projects together with the recipient nations’ borrowing all of the funds, and with the Chinese acting as both builders and creditors. This tremendously diminished much, if any , Chinese incentive to assess the economic sustainability of specific projects, since individual nations would be on the hook for their sovereign debt.
The reaction from Mozambique, in cancelling their project, was for the purpose of reassessing the conditions of a pending deal, and to encourage the Chinese to finance their projects along western lines, using a combination of total foreign debt and equity. That would have the effect of shifting construction, operating, maintenance , and financial risks to the Chinese. This is something that the Chinese are not likely to do, because their decisions are not based strictly on financial considerations, but also contain major geopolitical factors in making infrastructure development loans. It could be, too, that the prospects of success were dubious in the first place, which is why the West avoided them.
Credit for recent reassessments can be attributed to two factors. The first has to do with former Australian Prime Minister Malcolm Turnbull’s suggesting that they, India, the US and Japan launch a countervailing challenge to China’ Belt and Road Initiative. It was visionary strategic proposal, which was ignored for a long time, as China made deals and headlines with its Belt and Road Initiative. It appeared that the West would be missing out on significant future business and influence in Emerging Markets.
The second factor had to do with the obvious disadvantages of doing business with Chinese, by their assuming all of the risks associated with doing projects with shaky prospects that were to be very heavily financed with sovereign debt. The West has also been more active recently in bringing increasing attention to the dangers of the Chinese model.
And, it’s working. Countries that are a part of the Emerging Markets have paused, and are reassessing the conditions of prospective deals, for a variety of reasons, some of which are related to major macro-economic factors. This presents the West in with an opportunity to present its own alternative. But, the West will not meet this challenge by simply criticizing the Chinese model and doing nothing. The Chinese can be expected to adapt to these new realities.
It must offer attractive alternatives to China’s business proposition. The US has made a contribution to this prospective effort with an increase in funding to OPIC, which is paltry compared to China’s ambitions for its own program. Its contributions will have to be significantly greater.
The West will have to also consider decisions, that will require closer collaboration between business and government, and with that, the allocation of risk between the parties for an extended time horizon for those infrastructure investments. This must involve creating multinational organizations aside from the World Bank and similar organizations, which have been criticized as being ineffective in both the industrialized countries and in Emerging Markets for failing to deliver projects that have not delivered the intended results.
And, it must be a consistent effort, one which will be part of the West’s strategic planning and resolve for a generation, at least.
Manuel H. Lazerov is President of Infrastructure Financial, Inc. He may be reached at infrastructurefinancial.org