The Belt and Road’s unforeseen boom for political risk insurance
Massive infrastructure projects are inherently political, opening up as they do room for accusations of corruption.
China’s Belt and Road (OBOR) initiative is a grand scheme which is touted as being the biggest single global infrastructure project to have been undertaken since the Marshall Plan which rebuilt decimated Europe after the Second World War.
But it strikes me that the biggest unintended consequence of the scheme is going to be the rise of political risk in the developing countries which lie on the OBOR route.
Public agencies and private insurance companies have experienced a boom in underwriting political risk over the past four decades of accelerating globalisation, and are likely to see the premiums they pull in for assuming that risk rise as a direct result of the strain imposed on emerging economies which are signing up to the OBOR scheme.
That might be to state the least of it as OBOR reaches into the entrails of the body politic in the poorer countries which are embracing the plan in the hope that the economic kicker it promises is actually delivered.
Massive infrastructure projects are inherently political, opening up as they do room for accusations of corruption and the saddling of nations with long-term debt which can crimp growth for future generations and potentially cripple local lenders.
One needs to look no further for evidence of this than in Malaysia, where the OBOR-linked East Coast Rail Link which was supposed to connect the East Coast of the country with Kuala Lumpur and Thailand was put on ice in early July, having run over initial cost projections.
A change of administration in the country following the shock defeat of the incumbent UMNO in the May general election might have prompted the cancellation of the project, but it neatly demonstrates the political deus ex machina at the heart of OBOR.
Similarly, Pakistan is faced with straddling the fiscal and political turpitude which seems inherent in OBOR.
The country, under newly elected president Imran Khan, is facing the prospect of being unable to pay tens of billions of US dollars of OBOR-linked loans owed to Chinese state-owned banks, granted at commercial lending rates and on terms which in many cases guarantee returns of as much as 30% on projects in the power generation sector.
An IMF bailout for Pakistan looms, or, as seems more likely, China will step up with the funds necessary to avoid a balance of payments crisis.
Likewise in Sri Lanka, the OBOR political risk spectre was instrumental in unseating a government which was forced to relinquish the Chinese-constructed port of Hambantota having failed to stump up the cash to service the loans granted by China to fund the project.
Frontier markets which sign up to OBOR are facing project construction costs which run up to around half of annual GDP - as a railway linking Laos with China which began construction in 2016 is facing down - a ludicrous ask and one that is inherently politically destabilising.
Perhaps the message is to get into the political risk insurance business in the markets of the weakest economies on the OBOR route. I can only imagine that the underwriting premiums will continue to ramp up as more projects are initiated under the scheme and more and more governments brought down by it.
8 Aug 2018