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Government partners to China’s belt and road plan should look closely at the numbers behind infrastructure projects in their countries as they could end up losing billions of dollars from these deals.
“What is worrying are projects that are built based purely on the export of surplus capacity (under One Belt One Road or OBOR),” says Boo Hock Khoo, vice president operations, Credit Guarantee & Investment Facility (CGIF) during The Asset's recent Asian Bond Markets Summit in Singapore.
“At the end of the day the recipient countries will be the one that has to pay back,” he says.
Khoo says China’s belt and road projects should undergo more rigorous scrutiny of their cost-benefit and effectiveness because the exported capacity comes with an exported capital. "The exported capital today is in the form of debt - concessional debt that needs to be repaid," adds Khoo.
Kalai Pillay, senior director and head of North Asia industrials, Fitch Ratings says that the real motivation of OBOR projects is exporting China’s excess construction capacity that is accompanied by financing from Chinese state-led enterprises.
“A lot of the big construction companies in China have bulked themselves up significantly over the last 10 years to carry out the big infrastructure projects in China. As many of these come to the tail end they have this excess capacity, the know-how, the real technical knowledge, a lot of patented technology that can be sold abroad, that needs to be exported abroad,” Pillay says.
He adds that there may be little room for non-Chinese banks and institutions to play a role in financing OBOR infrastructure projects.
“The final leg to this is the capital. There is excess capital which finds itself into all kinds of things, international bond markets, the spread market wherever. But one way to export it also is through financing projects that’s going to take place outside of China. So that’s part of that OBOR strategy,” Pillay says.
However, there may be opportunities for investors who can finance other projects that can be built around completed OBOR projects.
“As an investor we’re waiting to see OBOR’s impact on Southeast Asia. Ten years later there will probably some projects built around those huge assets which hopefully the OBOR initiative would create. But do I see it materially impacting our lives in the next few years, the short answer is no,” says Vijay Pattabhiraman, chief investment officer, global real assets, Asia infrastructure, J.P. Morgan Asset Management.
Gregory Liu, senior vice president and head of China, export and agency finance, investment banking department Asia, Sumitomo Banking Corporation, says some OBOR projects may be classified as government-to-government (G2G), which are not as attractive to debt investors as commercially-viable private sector financed projects.
“As a debt investor we will focus on those commercially viable projects. In terms of OBOR some of them may be classified as G2G projects. That’s quite similar to the buyer’s credit. If a country wants to sell its equipment, its service – it may put together some financing to facilitate those. But at the same time, I think many projects in this region with Sino-foreign joint venture are on commercial basis. Those are the areas for us as a debt investor to consider,” Liu says.
Abhishek Badkul, executive director, project and export finance at Standard Chartered agrees. “Project finance opportunities continue to be there, but it’s only a small proportion of the whole infrastructure market,” he says.
23 Nov 2016