The declared list of infrastructure projects (financed by the two leading credit agencies China China development Bank, CDB and the Export-import Bank of China, CEXIM, as well as the recently established transnational Asian infrastructure investment Bank) has no precedent in history. Nevertheless, the "One belt and one road" is just a natural extension of the global process of rapid change in the world of financing infrastructure in the developing world. And the history mentioned change has more than two decades.
The truth is that the West has long since conceded to China's leadership in this area, and this phenomenon can be explained not only by aspects of foreign policy as domestic politics of Western countries regarding the development of its own infrastructure. The same factors at the same time prevent the launch of a large-scale infrastructure projects in the US and Europe and reduce the degree of attractiveness of the West-sponsored projects in developing countries in comparison with Chinese sentences.
The approach of the PRC to a foreign infrastructure is fully consistent with the policy in relation to domestic objects. The main criterion for the evaluation of the project remains the extent of its impact, not the specifics of its feasibility or profitability. The Chinese tend to overestimate the usefulness of related economic effects from the implementation of infrastructure projects, underestimating the scale of the damage potential — economic, social or environmental.
In the West profess a different approach — more business with the scope to conduct a thorough pre-audit of all the possible economic, social and environmental impacts of each specific project. Such a precaution ensures that the interests of ordinary people in developing countries.
But the unwillingness of Western institutions to risk has reached such proportions that the cost of the projects (and the necessary time) skyrockets. And not to pass finally all positions and to prevent the formation of a monopoly of China, the governments of Western countries (and also influenced international organizations such as the world Bank) must in the future exercise more flexibility in evaluating the feasibility of projects.
Over the past two decades, Chinese construction companies have gone from obscurity to dominance in the international industry infrastructure. The projects of these companies carried out in the framework of the policy of "One belt and one road" aimed at stimulating the inflow of foreign investments, were financed almost exclusively by two Chinese state-owned credit institutions. And if in 2002, their overall share in lending to the construction industry amounted to about 25% by 2016 exceeded 75%.
In 2016, the total assets of the banks CDB and the CEXIM more than 3.5 times exceeded the total assets of the 6 largest multinational and regional development banks: the International Bank for reconstruction and development, European Bank for reconstruction and development, Asian development Bank, the African development Bank, inter-American development Bank and International Finance Corporation.
Arguing about the causes of this trend, Western commentators often mention three advantages of China over the West in the field of infrastructure development: first, the presence of authoritarian States, not obliged to take into account the views of all stakeholders; secondly, the elected PRC foreign policy strategy of building influence through lending for infrastructure development; and thirdly, domestic policy in support of domestic construction enterprises.
Naturally, the above-mentioned factors do play a role, but with their help it is impossible to explain how China has managed to achieve such a comprehensive success in this field. At the initial stage, the policy Bank lending provided by China went mostly to other authoritarian States (e.g., Venezuela or Ethiopia), but today the Chinese funded structures and projects in democratic countries (for example, the network of highways in the Balkans and Eastern Europe).
Beijing may seek to strengthen the impact by issuing infrastructure loans to other countries, but the degree of effectiveness of such diplomacy is too often overestimated. The term of the loan really looks tempting for a potential borrower, but the said project after completion of construction works of special effects already don't provide.
Elites, it is possible to be something of interest in the short term, but many Chinese projects provoke deep resentment among the local population and often yield results quite different from the expected. This has already happened in Argentina, Myanmar and Sri Lanka, where the transactions entered into with Beijing's authoritarian leaders or outspoken populists, in the end, contributed to the discrediting and the leaders, and the Chinese themselves.
Much better the reasons for the growing dominance of China in the industry of global infrastructure construction explains the following fact: Chinese companies and credit institutions just profess a different approach, radically different policies from their Western counterparts.
The approach of the West is allergic to risk
Today, the Western agencies dealing with lending to development projects, are forced to pay for the burden of the past — for the time when these organizations, in fact, was to borrowing countries, the only possible source of funding. The feasibility of potential projects then consistently evaluated so that the total benefits always outweigh the potential economic costs and credits will certainly repay. Since the late 80-ies in the evaluation process, in addition to the purely financial aspects, began to take into account the consequences of a different kind: for environment, safety, society, etc., i.e. what economists call "negative external factors".
Addressing the possible negative external factors in the process of painstaking audit of critical importance in cases where a particular infrastructure project is simply obliged to bring the community only benefits. However, the potential costs should be compared with all the probable benefits of the projects, and the generation of electricity, access to clean water, creating jobs and improving overall economic growth.
In the West the stringency of the conditions for the evaluation of projects over time have undergone certain changes. Western lending institutions led by the world Bank gradually increasingly tightened the already burdensome requirements for borrowers. In the 90-ies and at the dawn of the 21st century, the world Bank is increasingly demanded of potential borrowers meet standards for the environmental assessment of projects — in effect, "exporting" these standards from Western countries to developing countries borrowers.
This approach significantly affected the volume of credit allocated by the world Bank. In the 80-ies and 90-ies of the international Bank for reconstruction and development (a division of WB) annually issued loans by an average of $ 25 billion, and in the period from 2000 to 2009 this figure declined to $ 16.6 billion per year.
So started the gradual withdrawal of the world's largest financial institutions to the credit market infrastructure projects, and by the time this process coincided with the political entry of Chinese banks in this business.
According to the results of internal audit 2010, the world Bank has been reform of the standard program of requirements for borrowers, and ultimately increase lending to infrastructure projects. However, the reform of the environmental policy of the Bank illustrated all the difficulties encountered in the process of practical implementation of any new initiatives. The development of the updated Basics of social-ecological policy (OSEP) the Bank has spent more than 6 years, but it is, in fact, was about the banality of the revision of the existing rules and procedures. Practical implementation of the updated OSEP, to be held in 2018
Many of the lessons the world Bank is typical of programs of bilateral lending to the United States. The last two decades, the us Agency responsible for the development, are in limbo because of internal problems of a political nature, and together created left and right: conservatives have criticized these structures for reckless spending, and liberals condemned the decision to invest for the lack of adequate environmental or social aspects. American environmental groups have recently filed lawsuits against two leading credit agencies, the overseas private investment Corporation, USA (OPIC) and the Export-import Bank of the United States for the financing of several overseas projects associated with the extraction and use of fossil fuels.
The most recent example of the more competent the American approach was the initiative of electrification of the African continent, Power Africa, launched by the administration of Obama in 2013 At the end of 2017, it became known that a large part allocated to this initiative allocations were simply redirected from other development programmes. In the end, the congressional budget office concluded: the US government as a result of implementation of the law on electrification of Africa even saved. In other words, a landmark for the President's program was not spent a penny of new or additional appropriation. For comparison, China over the past decade, "poured" in the country of South Africa from $ 60 to $ 70 billion in new loans.
The East model is better?
So maybe the dominant more recently, the Chinese model should be considered the best policy option in the field of infrastructure development — both for borrowers and for China? But the analysis of past Chinese political banks of experience in this field speaks about the faults of the Eastern approach in almost all indicators.
For decades, China has been investing heavily in domestic infrastructure, and recently this budget has been an invalid portion of the proceeds of the PRC. By 2016, the volume of gross investment China in fixed assets is the total volume of investments in tangible assets exceeded 45% of GDP. The sharp increase in this index coincided with a radical increase in the volume of domestic debt in China and the government of the country a large part of 2014 and 2015 spent on curbing the problem.
Ultimately, Beijing demanded that domestic banks to provide refinancing of debt of the local authority "agreed" interest rate, offering in exchange the government guarantee. This decision has averted a crisis, but the debt obligations of local authorities in China, in fact, has been shifted to the national budget.
Described above gives an idea about the lending practices of other countries with China, but this practice has several critical features. First, foreign partners receiving Chinese investment is not at all the regions of China, as a sovereign state. If the debts of these countries to China will grow rapidly, the Chinese government will be substantially less opportunity to remedy the situation. Secondly, the implementation of foreign projects (in contrast to domestic development programmes) all the positive external factors that are generated as a result of construction of infrastructure may not automatically accrue to China. On the contrary, overseas Chinese companies have to produce them in the course of competition with colleagues from these countries.
Western experts accuse the Chinese political banks to use "diplomacy debt traps": for example, Beijing allegedly drove Venezuela into debt more than $ 60 billion (and Sri Lanka — by $ 81 billion), and projects proved to be economically unprofitable.
The experts did not take into account the fact that the Chinese political banks clearly suffered a loss in incredible amounts in both countries. Even a cursory analysis suggests that the world is just littered with China financed infrastructure projects, which even in theory could not be cost-effective. This means that issued under these projects, loans are either not served, or (in the case of government guarantees loans granted countries) have become a burden for borrowers. And here it is possible to say that it is similar to Venezuela, countries are exploiting China and not Vice versa.
The program of lending to foreign borrowers of the Chinese political banks is relatively young, but the signs of insolvency are already starting to emerge fully. This is especially true for the export-import Bank CEXIM lending only to foreign borrowers (while 70% of the Bank's loans CDB directed to projects in China).
Official CEXIM Bank's losses on loans in 2008 was negligible, but in 2015 and 2016, they increased sharply to more than $ 5 billion a year. In 2015, the Ministry of Finance of China has allocated more than $ 90 billion, distributed these funds equally split between the banks, the CDB and the CEXIM. According to the Ministry, immediately before the recapitalization, the capital adequacy ratio of CDB (Bank solvency indicator) was less than 9%, and the CEXIM he was down to only 2.26%.
A characteristic feature of the lending policies of the Chinese political banks — lack of transparency: the vast majority of projects are implemented through direct agreements. Often do not understand, on what conditions and under what obligations issued by a particular loan. And even more importantly, there is no clarity on the issue, supported by state credit guarantees or it is issued on a "without recourse", i.e. the loan is secured solely by the assets of the project and the borrower in case of default always remains on the hook for the lender.
If the main goal of China's lending programs do is to strengthen the influence of the country on the world stage, from this point referred to the program as a whole look rather ineffective. Today, many countries receiving Chinese loans financing in record amounts, there was the most difficult (and not best) bilateral relations with China.
The most striking proof we can assume relations with Sri Lanka, where the scale of Chinese investment has peaked. A welcome exception was only the Pakistan and South Asian countries that are among the major recipients of Chinese loans in the framework of the initiative "One belt and one road", has already revised its policy in favor of strategic alliances with India, Japan or the United States.
The Western model is preferable?
Credit institutions of the West should act, not just wait for a natural sunset credit programs of China. The international bodies responsible for lending to the infrastructure construction, should be restructured with a view to realizing the simple fact — they are not the only possible alternative for the borrower.
A new generation of Western lending programs should be based on transparent, competitive procurement procedures, financing without recourse and with no hidden state guarantees, but at the same time and without charge to debtor countries seeking to implement their projects, and frankly redundant requirements.
For active promotion of overseas projects, Western credit institutions must be protected from the attacks of local politicians. We are not talking about "race to the bottom" in the fight for infrastructure projects from development agencies. Today Western institutions responsible for program development, brought to the point of incapacity at which they are no longer able to initially implement the tasks set before them. And China just fills the vacuum.
The article was published in Foreign Affairs may 21, 2018 © Council on Foreign Relations // Tribune News Services. Authors: Executive Director of the Center on Global projects, Stanford University Michael Bannon, post-graduate student at Stanford University, an expert on civil engineering and ecology, as well as procurement of international infrastructure projects Bushra Bataineh, Director of the Center for democracy, development and the rule of law at Stanford University Francis Fukuyama.
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