Thursday, May 23, 2024
CommentaryA decade of infrastructure financing: The impact of the Belt and Road...

A decade of infrastructure financing: The impact of the Belt and Road Initiative

Ten years ago, the global economy was reeling from the aftermath of the 2008 financial crisis in the United States. While major economies struggled to recover, China emerged as a fortunate exception, capitalizing on the crisis and swiftly ascending to become the world’s second-largest economy by 2010, surpassing Japan.

China’s rise not only lifted millions of its citizens out of poverty but also showcased a state-led development model characterized by substantial investments, amounting to trillions of dollars worldwide, primarily between 2013 and 2023. This extensive financial backing facilitated infrastructure development, fostering connectivity across Eurasia, Africa, and Latin America, ultimately transforming the economic landscape.

Throughout history, infrastructure connectivity has served as the backbone of human civilization. In the modern era, diverse forms of connectivity, including railways, roads, energy pipelines, fiber optics, power grids, and airlines, are indispensable for thriving civilizations. As productivity, innovation, science, and technology advance, the demand for robust connectivity infrastructure becomes increasingly vital. However, many nations face a significant challenge in securing adequate financing for infrastructure development, as financial resources remain scarce and limited to a privileged few.

States have various options for financing their infrastructure needs. One approach is the utilization of sovereign wealth funds, tapping into national reserves dedicated to specific infrastructure projects. However, this option is typically available to financially capable states, presenting a challenge for many developing nations. In such cases, alternative funding sources like debt financing or equity financing can be explored.

Debt financing involves a lending state or institution providing funds to the borrowing state at an agreed-upon interest rate, either on commercial or under concessional terms. Numerous multilateral development banks and states worldwide offer loans to states in need. The borrowing state is then obligated to repay the debt within a specified timeframe.

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Equity financing, the third mechanism, entails financing a project through ownership shares. For instance, if State A plans to develop a railway infrastructure, it may collaborate with State B, which would hold a share in the project. The project would be constructed using the financial contributions made by the state(s) that own shares.

This approach allows the financing state(s) to have a stake in the infrastructure for an extended period. Following project completion, the management and decision-making responsibilities would be shared among the participating states based on their respective ownership shares.

The financing arrangement of the Belt and Road Initiative (BRI), an infrastructure initiative launched in 2013, aligns with the three aforementioned mechanisms. Over the past decade, as China celebrates the tenth anniversary of the BRI’s inception, a wide range of infrastructure financing alternatives have been envisioned and implemented. The initial proposals outlined in the 2015 Vision document by the Chinese Ministry of Foreign Affairs and Ministry of Commerce shed light on the expected financing sources.

The document underscored the significance of financial integration as a crucial tool for realizing the BRI’s plans. This integration called for strengthening financial cooperation, establishing a currency stability system, investment and financing system, and credit information system among BRI beneficiary nations.

As a financing source, the document anticipated the solicitation of funds primarily from the Asian bond market. Additionally, there was a strong commitment to establish multilateral development banks capable of financing infrastructure development such as the Asian Infrastructure Investment Bank (AIIB), BRICS New Development Bank (NDB), Shanghai Cooperation Organization (SCO) financing institution, and the Silk Road Fund.

The document also encouraged BRI member states to utilize their sovereign wealth funds and integrate with the Silk Road Fund as another financing option. Equity financing was not overlooked either, as the vision document aimed to stimulate the involvement of commercial equity investment funds and private funds in key projects of the initiative.

The Silk Road Fund was established with a registered capital of USD 40 billion, solely pledged by China to facilitate financial collaboration with BRI beneficiary nations. The Asian Infrastructure Investment Bank (AIIB) emerged in 2013, at a similar time to the BRI, and evolved into a robust multilateral bank with a registered capital of USD 100 billion. China played a significant role by pledging half of the capital, with other member countries covering the remaining portion. The New Development Bank was also established after 2014 by BRICS member countries, each contributing equally to the pledged capital of USD 100 billion.

Chinese commercial and development banks actively participated in providing substantial financing. China Development Bank and Export and Import Bank alone disbursed approximately USD 200 billion before 2017. Other banks such as Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), and China Construction Bank (CCB) allocated over half a trillion dollars for BRI projects through debt or loan financing.

Over the course of a decade, trillions of dollars have been invested in global infrastructure development, with expectations of allocating an additional USD four to eight trillion in future investments. According to Chinese government sources, around 3,000 projects have benefited from the initiative.

Notably, the Ethio-Djibouti Railway line and the industrial parks along the railway have been constructed using finances accrued from BRI. Ethiopia, like 148 other countries, has joined the BRI. Among the participants, 44 countries are from Sub-Saharan Africa, 35 from Europe and Central Asia, 30 from East Asia, Southeast Asia, and the Pacific, 21 from Latin America and the Caribbean, and 18 from the Middle East and North Africa, all of whom have agreed to collaborate with China through the BRI.

The fact that more than two-thirds of the world’s states are participating in the BRI is not simply a result of countries flocking towards China. It signifies a mutual interest, particularly in the area of financing infrastructure development. The BRI provides an excellent opportunity for states that struggle with financing their infrastructure needs. However, the BRI is not solely focused on overseas infrastructure financing; it goes beyond viewing financing as a mere business transaction.

As the BRI involves the crossing of national boundaries through infrastructure projects, it necessitates consultation and engagement with each participating state based on their unique characteristics. This aspect of the BRI promotes state-to-state policy coordination, allowing participating states to set their own development priorities and engage in negotiations with China on equal terms. One interesting aspect of the BRI is that there are no coercive mechanisms or imposed conditionality on beneficiary nations to derive benefits from the initiative.

Past experiences serve as lessons for future growth. As the BRI celebrates its tenth anniversary, developing nations, in particular, can expect more from initiatives like the BRI, as foreign financing is crucial for addressing their inadequate infrastructure conditions.

Dareskedar Taye (PhD) is a lead researcher at the Institute of Foreign Affairs.

Contributed by Dareskedar Taye

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