Connecting China to Asia and beyond
This year’s Future of Finance Summit in Beijing discussed China’s Belt & Road Initiative and opportunities and challenges it brings forth for new and traditional modes of financing
China’s development drive to connect historical hot-spots of trade has laid foundations for domestic enterprises to go global. The Belt and Road Initiative (BRI) has set-off a global era of soft and hard infrastructure building, one supported by a combination of private capital, multilateral lending and foreign government loans. Broadening market access for Chinese goods elsewhere, the project powers economic integration, creating demand for huge financing in transportation, energy and telecom along the route. BRI continues to drive regional cooperation activities in Asia. South Asia Sub-regional Economic Cooperation (SASEC) comprising countries like Bangladesh, Bhutan, Maldives, Myanmar, Nepal and Sri Lanka have voiced operational priorities in areas of energy, trade facilitation, transportation and building a robust economic corridor. Ayumi Konishi, Special Senior Advisor to the President, Asian Development Bank talked about brightened prospects of cross-border trade intra-region. “There is a new prospect for new connectivity among East Asia, Southeast Asia and South Asia, because Myanmar has also joined SASEC in 2016. Myanmar will act as a bridge between Greater Mekong Sub-region (GMS) and SASEC and improve border activity between East, Southeast and South Asia.”
This year’s Asian Banker Summit as the Future of Finance Summit covered a comprehensive dialogue on investment financing around BRI, right in Beijing- also the core for all ‘BRI related policy action’. With numerous stakeholders- Chinese state banks, international investment banks, borrower countries, multilateral institutions and private vendors, BRI constitutes and demands all but one crucial thing- financing. While public funding through government to government grants or traditional export credit models was successful in raising hundreds of billions of dollars in pledges, it came at the cost of exposure to poor credit countries. Large-scale, complex, cross-border projects require a more diverse financing model such as the Public- Private Partnership model or the PPP.
PPP- A channel for long term commercial financing
An overly stretched state budget has struggled to directly finance major projects envisaged under the BRI. With many participating countries also facing leaner budgetary outlays, PPP’s have emerged as a preferred way of mobilising alternate sources of finance. Hwa Erh-Cheng, Chief Economist at Baoshang Bank highlighted types of popular infrastructure financing, one that comes from public sector, and the other as a shared resource from public and private sector. “Financing from public sector, best viewed as a “public good”, the second broad category is one of dual nature, a combination of public and market good nature. PPP falls into second category”. Relevant authorities in China are promoting PPP in the form of ‘social capital’- which includes the state owned enterprise and the private sector. China sees PPP as a sustainable medium to alleviate pressure on the state owned banks. Arguably, policy banks and multilateral financial institutions are currently the primary participants in ‘development financing’. To be able to attract more funding, use of PPP funding model will create new opportunities to spread and shrug risk from one party to several parties- a run-up to risk diversification. Jason Zhenrong Lu, Acting Head & Lead Infrastructure Finance Specialist, Global Infrastructure Facility (GIF) at World Bank related PPP to a new pattern of financial cooperation. “While the role of the Govt. is important to provide public infrastructure services, PPP has stood out as an important aspect of mobilising and leveraging private sector resources for long term commercial finance”.
Challenges in PPP financing - A new criteria to be met
While PPP has bought international best practices that are in the midst of adapting to China’s domestic institutional setting, concerns and calls for better protection of private investor rights, a dose of fair play between private and state-owned sector and lack of bankability of private sector projects present multiple chronic problems. China’s PPP’s are also plagued by tendency of being ‘relationship heavy’, representing weak governance and obvious risks. Richard Jones, Business Development Director at Asian Infrastructure Investment Bank - European Bank for Reconstruction and Development voiced difficulties in implementing PPP’s in developing markets. “When the projects are non-economical in smaller markets and market conditions are not adequately developed, designing a PPP deal is even more complicated”.
One of key themes to come out during the Belt and Road panel discussion was build-up of risks and financial institutions’ subsequent capacity to leverage and service the risks. Consistent with de-risking as an emerging practice among global banks, the deployment and administration of funds through full project cycle were rated as key concerns. Panellists viewed this as no surprise owing to a common knowledge: investment in emerging markets is notoriously risky. Panellists were also quick to jump to the issue of costs associated with longer term financing.
Richard Jones pointed out challenges arising at each stakeholders end, especially coming from an emerging markets perspective. “The key things in infrastructure projects is risk allocation, and especially for infra projects, the challenge is one, it takes very long time- 3-5 years to prepare- do feasibility studies and if you look at private sector, typically they don’t have the capital to do this as its very expensive and a high risk capital for them. The case of developing countries becomes more difficult as they don’t have experience and the government is prone to a shaky administration”. He also covered ground on the lack of government involvement in conducting a proper cost-benefit analysis. “The Government similarly in many of these countries don’t have the technical skills, don’t have financial resources to put into early project preparations and continuously suffer from overflow of pipeline of projects infested with little preparation of feasibility studies.”
The panel discussion while concluding that financial institutions will continue to seek new and safer modes of collaborative financing, highlighted that the real challenge was not about money financing, it was lack of existing bankable projects.
Institution: South Asia Sub-regional Economic Cooperation, Asian Development Bank, Baoshang Bank, World Bank, Asian Infrastructure Investment Bank - European Bank For Reconstruction And Development
Region: East Asia
People: Ayumi Konishi, Hwa Erh-Cheng, Jason Zhenrong Lu, Richard Jones