This article is based on a presentation made by the author at the conference “The Belt and Road: China’s flagship initiative and its implications for the global economy” at Chatham House, London in October 2017
After the ambition of the Beijing summit, back in May 2017, comes the reality of financing the Belt and Road initiative (BRI). How might the risks of building and operating BRI schemes be spread and what will be the role for private investment?
Notwithstanding China’s substantial foreign currency reserves which are being made available for investment, the BRI is so vast in its ambition that China simply does not have the money to publicly fund all BRI schemes. Furthermore, unless BRI risks are carefully spread, there could be real concerns about China’s return on investment and the ability of some countries with poor credit ratings to repay any BRI loans.
It is clear that vast amounts of private finance are going to be required to underpin China’s public commitment to this initiative. There is therefore both a need and an opportunity for private investors to make this vision a reality.
An increasing number of BRI projects are already moving from a traditional engineer-procure-construct model to a build-transform or build-operate transform model with public private partnerships (PPP) becoming increasingly common.
Many BRI projects could be suitable to procure using alternative finance. These models can assist in ensuring the necessary investment and higher quality of services with some PPP methods not imposing unforeseen public sector expenditure. Appropriate risk allocation can enable a reduction in risk management expenditure and, in some cases, assets designed under PPP agreements can also be classified off the public sector balance sheet.
PPP models combine the strengths of the public and private sectors in a delivery model which increases the likelihood of delivering an asset on time and at cost. Private sector experience can also be harnessed with innovative solutions introduced to drive long-term, public value.
There is a growing willingness in the investment community to support infrastructure development, whether through bonds or long-term involvement. However, all private investors will want to ensure they are investing in the right projects before they do so.
For BRI schemes to attract real interest from private investors they must become investible. Whichever form of private sector finance is used, construction risks must be properly managed. Unfortunately, in too many cases large-scale infrastructure projects still take too long from inception to implementation, cost too much to deliver and are too costly to operate and maintain.
These are the challenges that BRI projects will also be facing. Without more early wins, the BRI could gain a reputation for an inconsistent delivery record, with high-risk vanity projects on long investment returns presenting major barriers to private investment. There is growing concern that funding for some BRI schemes risks becoming mis-deployed or wasted on projects that lack a sufficient business case and that should never have been funded in the first place.
One project that is often referred to in this regard is the $209m Mattala Rajapaksa International Airport in Sri Lanka, dubbed the emptiest airport in the world, which serves on average one passenger aeroplane each day. Sri Lanka has ceded control of the airport to China in exchange for wiping off some of the debt Sri Lanka owed to China. For BRI projects to really succeed in attracting private investment there must be more emphasis on outcomes and less on transactional products.
The BRI is being built during what it is hoped will be a global renaissance for infrastructure construction, where BRI schemes will be competing against other projects globally for private sector investment. The Global Infrastructure Outlook, a G20 initiative, currently forecasts a $15 trillion investment gap between the global required investment in infrastructure and the current forecast trend. There is therefore a substantial financing shortfall, with too many infrastructure projects globally chasing too few investors.
There are numerous flagship projects globally which demonstrate that infrastructure can prove a very attractive investment, such as Crossrail and Thames Tideway in the UK, railways in Sydney and Melbourne in Australia and Metrolinx in Canada. These projects all make a connection between investment and long-term value and are being delivered as part of a longer-term vision.
To invest in infrastructure, investors require a clear understanding of risk. However, some BRI projects are taking place in parts of the world that are more vulnerable to the challenges of geography, political instability and terrorism. Higher risk BRI projects may well struggle to attract any private investment at all or investment on terms considered commercially acceptable. It may be that if such projects are to be built then these are the ones that China must directly finance.
With an initiative as large and ambitious as the BRI, it is easy to assume that a one size fits all approach will be possible. That will not be the case. There will always be some projects that will struggle to attract private sector investment. However, other BRI schemes could and should become attractive investment opportunities. What will be required is a cocktail of solutions that matches the most suitable funding model to the nature and location of the underlying asset.
If the risks of constructing the BRI are really to be shared with the private sector then a new model for investible infrastructure will be required. The most successful projects have been shown to be those that take a partnership approach and a long-term view. Unfortunately these successes are not yet the norm. Too many infrastructure projects are still rooted in short-term gain and can include poorly delivered, political trophy projects. Neither provide an attractive proposition for private investors.
The BRI is an initiative that captures the imagination. It revives a 2,000 year old concept of physical connections acting as a catalyst for peace, openness, learning and development. BRI schemes should be well placed to attract private investment if they are well structured and satisfy an underlying infrastructure need. There should be many compelling opportunities as part of the BRI but those projects must become investible, particularly at a time of competing demands. Relying on the idea of sharing in the Silk Road spirit will be insufficient to attract the private investment from which the BRI could really benefit.
 See note 1