The planning behind many of China’s major infrastructure projects abroad has been “downright inadequate”, leading to huge financial losses, according to the head of the country’s state export credit insurer.
Wang Wen, of China Export and Credit Insurance Corporation, known as Sinosure, said Chinese developers and financiers of projects in developing nations supported by Beijing’s “Belt and Road Initiative” need to step up their risk management to avoid disaster.
He cited the mistakes of a major railway project in Africa that has cost Sinosure close to US$1 billion in losses, according to its chief economist.
Lessons should be drawn from the poorly executed US$4 billion Addis Ababa-Djibouti freight railway that was inaugurated early this year but has already had to restructure its debt because of underuse caused by power shortages, Wang told a belt and road infrastructure financing forum in Hong Kong earlier this month.
“Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank it was still insufficient.”
He said other China-backed projects plagued by poor preparation have included sugar refineries that have lacked a supply of sugar beet, and underused railways in Latin America.
His comments were a stark reminder to Hong Kong financiers and investors at the forum looking to tap belt and road opportunities of the risks of backing projects in developing nations.
Put forward five years ago, President Xi Jinping’s “Belt and Road Initiative” aims to create modern-day Silk Road trading routes across Eurasia and Africa by building railways, roads and ports. It has, however, so far relied on state financing, which has raised concerns about its sustainability and political impact.
The Hong Kong Monetary Authority has been working hard to make the city a financing hub for belt and road projects.
The Addis Ababa-Djibouti railway, Africa’s first cross-country electric railway, was built by China Rail Engineering Corporation and China Civil Engineering Construction Corporation and backed by US$3.3 billion of loans from the Export-Import Bank of China.
Sinosure, which provides payment guarantee to the project, is now almost US$1 billion out of pocket on the 756-km railway that gives landlocked Ethiopia sea access through neighbouring Djibouti, said Wang.
Many large projects in nations supported by the belt and road strategy are financed by Chinese banks, often with payment guarantees or default insurance provided by Sinosure.
Others are provided by multilateral policy banks such as the China-initiated Asian Infrastructure Investment Bank (AIIB). The rest are commercial-oriented projects such as power plants and toll roads that commercial banks are willing to lend to.
Policy banks’ so-called “concessionary lending” at favourable terms to borrowers is mostly off-limits to international commercial banks because of their profit objectives.
There have long been calls for more private sector funding.
“[Belt and road] projects are such a mammoth undertaking, to realise them we have to get commercial capital involved,” said Peter Burnett, Standard Chartered’s head of corporate finance for Greater China and North Asia in an interview. “That is going to happen and we are beginning to see it.”
Although Asia has a huge amount of private savings looking for safe long-term investments, suitable projects are hard to find within the region and most of the funds end up in developed markets, said AIA’s group chief investment officer Mark Konyn.
The life insurance giant has doubled its allocation to infrastructure to around US$20 billion in the past decade, he added.
To help change this, the Hong Kong government’s mortgage insurer Hong Kong Mortgage Corporation earlier this month said it plans to buy a diverse basket of infrastructure loans in nations not limited to the belt and road’s geographical scope next year and explore the idea of “securitising” or repackaging them into securities to be sold to investors.
HSBC Greater China chief executive Helen Wong said the initiative would help “recycle” commercial banks’ capital to be redeployed into other greenfield infrastructure projects, besides enabling wider capital markets participation in regional infrastructure development.
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