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Belt and Road needs an image makeover
The Belt and Road has spawned much negative sentiment, so a new approach could be to internationalize its engineering, spread debt ownership and diversify its investor base
Jonathan Rogers 29 Jan 2019

It's probably too early to describe the Belt and Road initiative as a public relations disaster; that call could be made when, and only when, the project had yielded a sufficient critical mass of defaults and failed construction such that the bulk of institutional investors would automatically see a red flag hanging by any Belt and Road proposal made to them.

We are not yet at that point - even though there have been some less than auspicious outcomes from Belt and Road schemes - but I suspect that 2019 will be something of a challenging year for projects initiated under the Belt and Road banner, even though the enterprise has immense potential when first perused.

According to the World Bank, if executed, the Belt and Road - announced by President Xi Jinping in 2013 - will encompass 30% of global GDP, some 60% of the planet's population and around three quarters of the world's extant energy reserves. That could well be described as thinking big.

Belt and Road comprises a variety of projects, including ports, roads, railway lines, airports and power stations. Yes, power stations; put something into the Belt and Road rubric and it will sit there relatively undisputed.

But it's beginning to seem as if many of the countries which sit in the Belt and Road geography are getting cold feet. More than a few are supposedly of the opinion that the project could well be, at least as far as the poorer nations are concerned, a "loan to own" strategic gambit.

This involves landing at a soft interest rate to a relatively cash-strapped country and then taking possession of the associated assets when the country fails to service the debt.

The Sri Lankans would be the most obvious exemplar of this thinking, with the Hambantota port in the country, funded by a soft loan provided by China on a 99-year lease, having been repossessed in late 2017 after the South Asian country failed to service the project debt.

The country's then leader Mahinda Rajapaksa, saw his political fortunes nosedive as the port failed, attracting just 34 ships in 2012 soon after its unveiling.

Although the port was not part of the Belt and Road, the subsequent fallout from the land title enforcement arguably ushered in a period of political instability in Sri Lanka.

Only last week, Bank of China stepped up with a US$1 billion loan to help the country to meet its first quarter foreign currency obligations, with more strain on the way as some US$5.9 billion of debt owed by the Sri Lankan government due later this year.

Meanwhile, in Myanmar, fears of a rerun of the Sri Lanka land requisition have trimmed the ticket size on a port project in Kyaukpyu until China agrees to scale back the project size. Examples of cold feet towards the Belt and Road are also emerging in Nepal and Pakistan where infrastructure projects are being rethought and downscaled.

And a less than salubrious ambience to the Belt and Road materialized recently in connection with the 1MDB scandal in Malaysia. The Wall Street Journal reported last month that China was willing to help "amortize" a large part of the US$4.5 billion, supposedly extracted fraudulently from the government-owned fund by funding Belt and Road initiatives in the country at inflated project prices. Chinese officials have denied the veracity of the report, but from a PR perspective, the story is somewhat damaging.

But perhaps a telling reason why countries should be wary of the Belt and Road, which "loan to own" box is that many of the projects commenced or inked under the new Silk Road concept are financially unviable according to standard project finance metrics.

Projects funded under the Belt and Road since inception have produced scant rates of return, way below the present value IRR calculations made by the project instigators prior to construction.

That is not to say that the entire Belt and Road endeavour is doomed, but that in the context of the challenging backdrop facing China, amidst compressing GDP growth rates - the +6.4% registered in the fourth quarter was the lowest in almost 30 years - and an ongoing trade war with the United States, it might need to do more to spice up the proposition.

One thing would be to open up Belt and Road projects to international engineering, procurement and construction (EPC) companies, rather than to just China-based enterprises which has tended to be the case so far.

Another would be to spread the debt ownership, via full syndication of loans rather than just taking the bilateral route, again as has tended to be the prevailing modus operandi.

And Belt and Road project bonds, fully sold down to international investors, should also be actively marketed, to disintermediate away from the dominance of the big state-owned Chinese banks in such projects.

The opportunity to tap in renminbi will help China's ongoing plan to internationalize its currency unit and reduce the hitherto prevalent dependence on US dollars for Belt and Road project funding.

Meanwhile, a range of regional currencies can be tapped for Belt and Road projects – something Bank of China (BoC) recently discovered when it was able to tap the Macau pataca as part of a multi-tranche bond issue to fund project construction in the Greater Bay Area around Hong Kong and Guangdong.

At a time when China faces the potential challenge of a secular decline in its economic growth to something less than the stratospheric rates which have prevailed over the past three decades, it behoves its financial authorities to become far more creative in their conception of the Belt and Road, in an effort to shake off the "debt diplomacy" label which too easily attaches itself to the entire project.

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