Interview on the Belt and Road Initiative in Africa

Today, I share with you some of my answers from an interview on recent developments in the context of China’s Belt and Road Initiative in Africa.

There have been reports of a slowdown in BRI lending in Africa and in other countries. What’s your view of this?

TZ: It is important to acknowledge the structural drivers behind the BRI. The Chinese economy has faced an increasingly severe overaccumulation crisis in the aftermath of the 2007-08 global financial crisis. Massive stimulus packages in the aftermath of the crisis only exacerbated overcapacities, especially in the infrastructure and construction sectors. From an economic point of view, the BRI has been the attempt to ‘move out’ these surpluses by financing infrastructure projects that are designed to link Eurasia and Africa.

Indeed, there has been a decline in funding, especially from Chinese policy bank as a result of stricter risk assessments. Whilst some of the numbers that are circulated must be treated with caution because of the overall lack of transparency when it comes to loan finance from Chinese policy banks, it is safe to say that there has been a significant decline in loan finance from China Development Bank and the Export-Import Bank of China in the last three years. We are currently witnessing an incremental shift in the financial governance of the BRI. The main reason for this shift is the waning debt sustainability of several key BRI participant countries (e.g. Kenya, Djibouti, Ethiopia, Sri Lanka) and the questionable economic viability of some BRI ‘flagship projects’.

For instance, Kenya’s new Standard Gauge Railway (SGR) has incurred a combined loss of $200 million between May 2017 and May 2020. At the same time, the Kenyan government is contractually obliged to pay almost $30 million every quarter in fees to Chinese-owned Afristar for the operation of the railway. The situation is similar in Ethiopia where the new electrified Standard Gauge Railway reported $40 million in revenues in 2019, while its operating costs were $70 million. As grace periods of the loans for these projects have come to an end, debt servicing costs have kicked in and eat up significant shares of public budgets. In the Kenyan case again, debt servicing costs for the SGR amounted to almost $900 million in 2020, even though some of the repayments are currently postponed as part of the G20 Debt Service Suspension Initiative.

Does this have anything to do with internal issues like a slowdown in the Chinese economy or risks in project host countries that have hurt the funding for the projects?

TZ: There are several reasons for the decline in funding and the gradual shift in the financial governance of the BRI. First, for a long time the lending of institutions such as China Exim Bank has been very risk-affine and supply-driven. In the early 2010s, the China Banking Regulatory Commission and China’s policy banks were directed to facilitate the ‘moving out’ of surplus capital and materials. This was mostly done by means of an extensive disbursement of concessional and commercial loans as well as export credit offers related to Chinese projects all across the world, not least along the Belt and Road. What we are increasingly witnessing now is that not all of the funding was based on comprehensive and independent project appraisals and feasibility studies. Again in the case of the Kenyan SGR, there were actually several independent studies and reports that clearly indicated that the construction of a Standard Gauge Railway on a new rail track would not be economically viable. Nonetheless, the project was implemented in exactly that way. In the African context, the ‘easy money’ that came from Chinese policy banks for infrastructure projects, combined with extensive borrowing at global financial markets, has started to cause debt distress for countries like Zambia. This brings us to the issue of political and institutional contexts in host countries. The sustainability of lending and the viability of BRI projects have been highly dependent on the governance context in host countries. We have seen sound and sustainable financial cooperation under the BRI in states where proper project assessments, transparent procurement processes and sustainable debt management were ensured. Countries where these circumstances were missing are now the ones that struggle to service the debt.

Some analyst said that many of projects that the Chinese government had funded in Africa were added as part of BRI. Does this explain the drop in new money for projects?

TZ: It is correct that many projects in Africa have been planned long before the Belt and Road Initiative. Many projects, for instance in the transport or energy sectors, then got a Belt and Road ‘label’, after Chinese state-owned banks and enterprises got involved in their implementation. However, this does not account for the overall decline in funding for BRI projects. The decline in funding is largely a result of a gradual government-directed paradigm shift within China’s policy banks – away from risk-affine lending to a more cautious appraisal of projects. Simultaneously, the Chinese government has started to actively encourage private investors at global financial markets to get involved in the BRI. This must be understood as another attempt to spread the economic risk of BRI projects to a broader range of actors, whilst at the same time upholding the momentum of the BRI.

Where do you see BRI projects’ funding in the short-term and long-term?

TZ: The recent decline in BRI lending heralds the end of the decade-long Chinese-funded infrastructure ‘bonanza’, at least for the time being. The Chinese government is well aware of the risk of the debt bubble that has been created through the BRI. Whilst the Chinese economy is robust and seems to recover quickly from the COVID-induced contraction of the global economy, a domino effect of debt defaults in major BRI participant countries would not leave the Chinese economy unscathed. The Chinese government is therefore not only reducing loan financing from its policy banks. There is also a gradual shift from public debt finance towards private project finance. Extensive loan financing has become increasingly risky for the Chinese government – not only economically but also politically. The Chinese government obviously wants to avoid to be made partially responsible for looming debt crises and highly probable austerity policies in some of the highly indebted BRI participant states. Therefore, the Chinese government increasingly incentivises its state-owned companies as well as private Chinese companies to enter into public-private partnerships (PPPs) abroad. This allows for continued demand for Chinese companies in BRI countries – yet without the risk of host governments not paying back the loans. In project finance PPPs, it is the Chinese contractor or equity investor itself who borrows the money from Chinese banks. The investment is recouped by tolling or other usage fees and hence independent of a host government’s ability to service the debt.

So, in the long-term it seems likely that this shift in the financial governance of the BRI away from public debt finance to private project finance will become more pronounced.

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