Pri­vate fi­nance called vi­tal for Belt and Road

China Daily (Canada) - - PEOPLE -

Re­search chief says ini­tia­tive calls for in­no­va­tive so­lu­tions to en­sure suc­cess of am­bi­tious in­fra­struc­ture projects cecily.liu@mail.chi­nadai­lyuk.

The Belt and Road Ini­tia­tive calls for in­no­va­tive fi­nanc­ing meth­ods to un­lock pri­vate sec­tor cap­i­tal and en­able its longterm sus­tain­able de­vel­op­ment, ac­cord­ing to Michelle Kar­avias, global head of in­fra­struc­ture re­search at BMI Re­search, a sub­sidiary of the US rating agency Fitch.

In­no­va­tive fi­nanc­ing struc­tures to de-risk projects, such as loan guar­an­tees, would help mo­ti­vate pri­vate sec­tor fi­nanc­ing, says Kar­avias. Mean­while, the emerg­ing new mul­ti­lat­eral de­vel­op­ment banks, such as the Asian In­fra­struc­ture In­vest­ment Bank, can use their flex­i­bil­ity and in­no­va­tion to con­trib­ute to tack­ling global in­fra­struc­ture fi­nanc­ing chal­lenges, she adds.

In­no­va­tive fi­nanc­ing struc­tures can help mit­i­gate the risks that would oth­er­wise be present in coun­tries cov­ered by the Belt and Road Ini­tia­tive, and such an in­clu­sive ap­proach to achiev­ing growth through the pub­lic and pri­vate sec­tors’ con­certed ef­forts is co­her­ent with China’s ide­ol­ogy of in­clu­sive growth, she says.

At BMI, Kar­avias leads a team of re­searchers con­duct­ing anal­y­sis of risks in the Belt and Road economies, the re­sults of which are then shared with pri­vate sec­tor clients who are keen to un­der­stand the risks and plan their busi­ness ac­tiv­i­ties ac­cord­ingly.

Pro­posed by Pres­i­dent Xi Jin­ping in 2013, the Belt and Road Ini­tia­tive seeks to in­crease con­nec­tiv­ity be­tween China and Europe, Africa and the rest of Asia through in­fra­struc­ture in­vest­ment.

Kar­avias says it is en­cour­ag­ing that Xi em­pha­sized that the Belt and Road is a glob­ally shared ini­tia­tive, not just built or driven by China.

“China is lead­ing it, but it is not some­thing China alone will have the bur­den or role in

ex­e­cut­ing,” she says.

China’s com­mit­ment to Belt and Road in­vest­ment is sig­nif­i­cant. Pres­i­dent Xi also con­firmed at the two-day Belt and Road Fo­rum for In­ter­na­tional Co­op­er­a­tion in Bei­jing in May that China will con­trib­ute an ad­di­tional 100 bil­lion yuan ($14.49 bil­lion) to the Silk Road Fund. The fund, founded in Novem­ber 2014 with China’s ini­tial con­tri­bu­tion of $40 bil­lion, aims to boost in­fra­struc­ture and im­prove fi­nan­cial co­op­er­a­tion along the cen­turies-old Silk Road trad­ing routes.

Yet in­fra­struc­ture spend­ing po­ten­tial is far greater. For in­stance, the McKin­sey think tank es­ti­mates that the world needs to spend about $57 tril­lion on in­fra­struc­ture by 2030, of which two-thirds will be re­quired in de­vel­op­ing coun­tries.

Kar­avias says the large-scale in­fra­struc­ture needs of the Belt and Road Ini­tia­tive could change how global cap­i­tal is mo­bi­lized to un­lock in­fra­struc­ture in­vest­ment, if pri­vate sec­tor in­vestors are will­ing to pro­vide fi­nanc­ing.

Kar­avias says there are two ma­jor ways to mo­ti­vate pri­vate sec­tor fi­nanc­ing. The first is the short-term so­lu­tion of gov­ern­ments and multi­na­tional in­vest­ment banks pro­vid­ing loan guar­an­tees for pri­vate sec­tor lenders.

Loan guar­an­tees are struc­tured in such a way that if a big project fails, the gov­ern­ments or multi­na­tional in­vest­ment banks pro­vid­ing the guar­an­tee will ab­sorb the debt obli­ga­tion.

Hence, the loan from the in­vestors’ per­spec­tive is the same as one is­sued to a gov­ern­ment.

The sec­ond so­lu­tion, which is more sus­tain­able, is the process of giv­ing tech­ni­cal sup­port to gov­ern­ment in­sti­tu­tions, which can then help con­trib­ute to the suc­cess of in­di­vid­ual in­fra­struc­ture projects. Such sup­port could in­clude the process of help­ing projects gain the nec­es­sary plan­ning and en­vi­ron­men­tal per­mits or work­ing with gov­ern­ments to cre­ate mul­ti­lat­eral reg­u­la­tory frame­works.

Kar­avias says that, so far, much of the fi­nanc­ing for Belt and Road in­fra­struc­ture projects has come from Chi­nese in­sti­tu­tions such as the Silk Road Fund. This is partly be­cause Chi­nese bank­ing in­sti­tu­tions of­ten have higher risk tol­er­ance, which al­lows them to take on more dar­ing projects in the Belt and Road coun­tries, many of which are lo­cated in fron­tier mar­kets with higher risks.

As well as the mas­sive scale of the Belt and Road Ini­tia­tive, an­other rea­son the con­cept has gath­ered so much at­ten­tion is its birth in an era when in­fra­struc­ture in­vest­ment is gath­er­ing un­prece­dented mo­men­tum.

“In­fra­struc­ture is get­ting more at­ten­tion than it had in the last few decades. We are at a point in time where we have more fund­ing avail­able from mul­ti­lat­eral de­vel­op­ment banks and pri­vate in­vestors fo­cus­ing on in­fra­struc­ture,” Kar­avias says.

Un­der­ly­ing such high in­fra­struc­ture fo­cus is the global re­ces­sion that fol­lowed the 2008 fi­nan­cial cri­sis, and the com­mod­ity price de­cline in more re­cent years.

“The re­ces­sion brought peo­ple’s at­ten­tion to struc­tural bar­ri­ers to growth, and the in­fra­struc­ture gap is one such struc­tural issue,” she says.

Within this land­scape, she says, one unique ad­van­tage of the AIIB as a newer bank is its abil­ity to be nim­ble and re­act quicker to fi­nanc­ing con­di­tions, in ac­cor­dance with its motto of “clean, lean and green”. The AIIB’s com­mit­ment to clean de­vel­op­ment is also in line with China’s fo­cus and ded­i­ca­tion to en­vi­ron­men­tal pro­tec­tion, she says.

“China is be­com­ing more prom­i­nent in the global re­new­able en­ergy space. It is be­ing more vo­cal about its com­mit­ments to the Paris Agree­ment and its lat­est five-year plan places em­pha­sis on ef­fi­ciency and en­vi­ron­men­tal pol­icy,” she says.

As well as its com­mit­ment to in­ter­na­tional en­vi­ron­men­tal pro­tec­tion, China’s do­mes­tic ex­pe­ri­ence in up­grad­ing in­fra­struc­ture is also key, as it can share its ex­pe­ri­ence of im­ple­ment­ing clean en­ergy in China in its process of bring­ing ex­per­tise to Belt and Road coun­tries.

“Emerg­ing mar­kets have the abil­ity to leapfrog de­vel­oped mar­kets in terms of tech­nol­ogy in­te­gra­tion, as much of the in­fra­struc­ture is be­ing built from scratch when it is much cheaper and eas­ier to in­te­grate new tech­nolo­gies, com­pared to the high cost of retrofitting ex­ist­ing in­fra­struc­ture as­sets,” says Kar­avias. “Cen­tral plan­ning at ear­lier stages is also key. For in­stance, rail is more ef­fi­cient and clean than roads; there­fore, there are many op­por­tu­ni­ties for new projects along the Belt and Road to lead tech­nol­ogy.”

In ad­di­tion to green tech­nol­ogy, China’s lead­er­ship in smart city plan­ning and the in­te­gra­tion of key tech­nol­ogy to ad­dress ur­ban­iza­tion de­mands are also im­por­tant lessons it can share with the Belt and Road coun­tries. Kar­avias says smart city so­lu­tions are very much about in­te­grat­ing tech­nol­ogy so that ex­ist­ing in­fra­struc­ture can be bet­ter used by the pub­lic.

Over the long term, smart city so­lu­tions are also about mak­ing cities resilient to global is­sues such as cli­mate change.

Look­ing into the fu­ture, Kar­avias is op­ti­mistic about the prospects of the Belt and Road Ini­tia­tive and the role it can play in an era when glob­al­iza­tion is con­sid­ered im­por­tant.

The pro­tec­tion­ist poli­cies in some de­vel­oped economies, such as the United States, fur­ther high­light the sig­nif­i­cance of the Belt and Road Ini­tia­tive in con­nect­ing coun­tries that are open to free trade.

“Trade is go­ing to be driven in­creas­ingly by emerg­ing mar­kets. Ris­ing pro­tec­tion­ism from some mar­kets is not detri­men­tal, but what we see is other coun­tries fig­ur­ing out how to trade more among them­selves,” she says.

For ex­am­ple, a mar­ket like Mex­ico would be look­ing at how to trade with other coun­tries in the Trans-Pa­cific Part­ner­ship fol­low­ing the US with­drawal and a po­ten­tial dis­band­ing of the North Amer­i­can Free trade Agree­ment. Mean­while, Rus­sia is look­ing more to­ward Asia for how to re­ori­ent its trade strate­gies.

“And within this con­text, the Belt and Road Ini­tia­tive will in­sti­gate global trade and in­crease the promi­nence of China within the global trade en­vi­ron­ment.”


Michelle Kar­avias, global head of in­fra­struc­ture re­search at BMI Re­search, says that in­no­va­tive fi­nanc­ing struc­tures to de-risk projects would help mo­ti­vate pri­vate sec­tor fi­nanc­ing.

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