The Belt and Road Initiative (BRI) is a far-reaching plan for transnational infrastructure development, connecting five continents through land and sea corridors, and industrial clusters. Launched in 2013, the BRI was initially planned to revive ancient Silk Road trade routes between Eurasia and China, but the scope of the initiative has since extended to cover 138 countries, including 38 in sub-Saharan Africa and 18 in Latin America and the Caribbean.

Prior to the Covid-19 pandemic the Asian Development Bank estimated that the infrastructure financing needs of emerging Asia alone would amount to $26trn through 2030. It is thus unsurprising that many low- and middle-income countries came to see the BRI as a vehicle for catalysing much-needed investment in capital projects.

By early January 2020, 2951 BRI-linked projects valued at around $3.9trn were planned or under way across the world. Although the criteria for what actually constitutes a BRI project are not formally defined, linking a project to the BRI through a memorandum of understanding (MoU) or another agreement provides access to finance from Chinese policy banks and specialist funds, as well as connections to Chinese contractors and suppliers eager to make use of their excess capacity.

Shifting Priorities

However, as borders began to close in response to the pandemic, and governments shuttered non-essential industries and asked citizens to stay at home, progress stalled on a number of major BRI developments. Restrictions on the movement of Chinese workers and construction supplies have been cited as factors for project suspensions or slowdowns in Pakistan, Cambodia, Indonesia, Myanmar and Malaysia.

“Some BRI projects are in poorer nations, which might require medical and health care assistance to be a priority ahead of continuing infrastructure development. However, this is likely to vary from country to country,” Chris Devonshire-Ellis, founding partner of Pan-Asian professional services firm Dezan Shira & Associates, told OBG.

Launched in 2013, the Belt and Road Initiative was planned to revive ancient Silk Road trade routes between Eurasia and China, but its scope has extended to cover 138 countries, including 38 in sub-Saharan Africa and 18 in Latin America and the Caribbean Taking into account that Covid-19 originated in Wuhan, China, in late 2019, the use of large numbers of Chinese construction workers on BRI projects has become a contentious issue in some nations, even though China has been relatively successful at containing the spread of the virus within its borders. “These factors require a considered approach and this is likely to lead to delays in the resumption of projects. However, these issues should be resolved in time,” Devonshire-Ellis added.

Major Driver

In many of the markets covered by OBG, big-ticket BRI projects have been a major driver of infrastructure development in recent years. For example, Egypt is ranked in the Refinitiv BRI Database as the country with the second-highest number of BRI-linked projects by volume after Russia, with 109 under construction or in the pipeline. It also has the seventh-highest cumulative value of BRI-linked projects (almost $100bn).

Saudi Arabia has emerged as the country with the fourth-highest number of BRI-linked projects by volume, with 106, and second highest by value, at approximately $195.7bn. Malaysia, Indonesia and the UAE also make the top-10 rankings for both project volume and value. Major BRI-linked projects under way or in the pipeline in those countries include the 950-MW Noor Energy 1 solar power plant in Dubai; the $6bn high-speed rail line between Jakarta and Bandung in Indonesia; and the China-Egypt TEDA Suez Economic and Trade Cooperation Zone.

Elsewhere, BRI projects underpin the major infrastructure pipeline for some developing states. For example, in Myanmar, a lower-middle-income economy, 33 bilateral agreements were signed in January 2020 for the acceleration of the China-Myanmar Economic Corridor (CMEC), which falls under the BRI umbrella. Projects planned as part of the CMEC include rail links and a deepwater port at Kyaukpyu, which will provide a strategic connection between China’s south-west and the Indian Ocean.

Debt Burden

One criticism sometimes levelled at the BRI is that developing economies risk unsustainable debt burdens for projects that are not necessarily in their national interest. For example, in December 2017 Sri Lanka formally ceded 70% control of Hambantota Port to a Chinese state-owned company on a 99-year lease after it was unable to service loans used to construct the $1.3bn strategic gateway on the Indian Ocean.

Perhaps mindful of this example, in 2018 Myanmar agreed to scale back the cost of the Chinese-funded Kyaukpyu deepwater port project from $7.3bn to $1.3bn, with some Myanmar officials voicing concerns that the project would disproportionately serve China’s energy, trade and security interests.

However, as the Covid-19-induced economic slowdown threatens to increase the debt burdens on developing economies, and places China itself under added fiscal pressure, Chinese loans linked to BRI projects are once again in the spotlight.

The number of bilateral loans made by Chinese state-owned institutions to foreign partners has increased in tandem with the proliferation of BRI projects across the world. According to a report published in the Wall Street Journal in March 2020, approximately $200bn in emerging market debt owed to China has not been reported in official figures. Researchers were able to trace much of this undisclosed debt back to BRI projects.

Meanwhile, a 2019 study by Germany’s Kiel Institute for the World Economy found that China was the world’s largest bilateral creditor, and that the combined debt owed to China by 50 developing countries had increased from an average of 1% of their GDP in 2015 to 15% by 2017.

China’s Response

Unlike multilateral institutions, direct loans from China’s policy banks are often extended at commercial rates and secured against collateral such as oil or other commodities. With many emerging economies now appealing to bilateral creditors and multilateral finance institutions for debt relief and restructuring, it remains to be seen how China will respond. In the past China has preferred to conduct debt renegotiations on a private, government-to-government basis. Despite this, China was seemingly included in a G20 agreement for a temporary moratorium on debt repayments from the world’s least developed countries to bilateral creditors, which was announced on April 15, 2020. However, later that month Chinese bankers and policy advisors told the Financial Times that the country was considering a variety of responses to the wave of applications for debt relief, including suspending interest payments or rescheduling loans for some borrowers, but permanently forgiving debt was unlikely and would only be a final option.

Strategic Reorientation

With China’s economy contracting in the first quarter of 2020 for the first time in decades amid rising unemployment claims at home, Chinese capital is likely to be mobilised to meet domestic needs in the shorter term, which may translate into reduced investment in the BRI’s more peripheral markets.

Combined with the fact that many of the countries signed up to BRI projects face escalating foreign debt pressures, the stage may be set for a long-term reorientation towards more strategic and cost-efficient infrastructure projects, which meet clearly defined domestic or regional demand, and rely less on opaque loans from Chinese policy banks.

Multilateral Approach

BRI projects in the pipeline could be made more open to varied financing options involving multiple stakeholders, such as multilateral institutions, foreign banks, private equity and green bonds. This could help to spread financial risks and encourage greater levels of transparency, efficiency and innovation.

Some of China’s neighbours and financing institutions active in Asia are well positioned to play a more important role in BRI projects. For example, Singapore has the technical and financial ecosystem necessary for structuring, funding and executing major infrastructure projects in South-east Asia, as well linguistic and cultural ties to China that should make it an attractive partner.

Even prior to the outbreak of Covid-19, private financing and co-financing had been playing a growing role in BRI projects. Efforts have been made to adopt formal lending rules similar to those of multilateral development banks (MDBs), and in March 2019 China’s Ministry of Finance signed an MoU with several MDBs to establish the Multilateral Cooperation Centre for Development Finance.

As of December 31, 2019 project financing was the main source of funds for 676 out of 1015 projects analysed in the Refinitiv BRI Database. Private sector finance accounted for 20.5% of the total funding for all projects in the database, while publicly listed firms contributed 6.8%. However, these totals are still significantly lower than the 46.1% of finance attributed to government institutions.

“China was increasingly open to the multilateralisation of the BRI prior to the pandemic and that will no doubt continue, with capital from multilateral institutions and private sources needed for certain projects to be sustainable,” Parag Khanna, founder and managing partner of FutureMap, told OBG.

However, Khanna, author of the book The Future is Asian, does not believe China’s domestic obligations will detract attention from the BRI, in spite of shortterm difficulties brought about by Covid-19. “The BRI will not lose importance for China, because it forms a significant portion of the country’s grand strategy. Much as we see China continuing its military doctrine of probing for opportunities, it will still seek to use the BRI as an umbrella for increasing its geographic connectivity, supply chain efficiency and commercial leverage with key states in Asia, the Middle East and further afield,” he added.

Broader Challenges

Beyond the BRI, the infrastructure industry in general is grappling with severe challenges as a result of the pandemic and the resultant travel restrictions. These include external financing bottlenecks, difficulties in mobilising consultants and contractors, delays in government approvals and permissions, and slowdowns in productivity related to remote work, according to Allard Nooy, CEO of InfraCo Asia, a donor-funded, commercially managed infrastructure development firm.

Due to constraints on the movement of construction equipment and materials, the crisis is also highlighting the need for logistics and supply chain diversification for better crisis management. There are indications that many Chinese manufacturers serving the construction industry have begun to cultivate alternative supply chains in South-east Asia.

Sustainable Growth

Notwithstanding the physical disruption to the infrastructure sector, much preparation work can still be performed online, which has allowed some progress to be made on certain projects. Promisingly, such projects include many that form part of the so-called green economy. Looking ahead, this could emerge as a sustainable, high-growth segment as policymakers seek long-term recovery strategies.

According to Seth Tan, executive director of Infrastructure Asia, a facilitation office under the Singapore government, told OBG, renewable energy projects offer particular growth potential. “Support for renewables appears strong, perhaps because such projects typically face fewer construction issues and tend to have a more straightforward revenue structure than other types of infrastructure. This allows for easier credit assessment compared to larger scale infrastructure projects, where revenue is exposed to market – or usage – risk,” he said.