Opportunities are plentiful in China’s Belt & Road Initiative and there are numerous sources of ﬁnancing available for companies hoping to participate. Stephen Lee, Executive Director and Group Head of Trade Product Management at DBS Bank, explains how private ﬁnanciers can assist.
China’s Belt & Road Initiative (BRI) provides an opportunity for companies to participate in large-scale investments across a diverse range of industries in countries from Asia on through to Europe. The stakes are high for both public and private partners, as the projects can entail signiﬁcant risks. However, the supply chain ecosystem gives rise to beneﬁcial economic spin-offs from the provision of everything from raw materials, such as steel and cement, to heavy equipment and machinery, as well as the multiple layers of contractors needed to build the infrastructure.
The Belt & Road Initiative
Launched by Chinese President Xi Jinping in 2013, the BRI is an ambitious plan to connect China with Asia, Africa, the Middle East and Europe through a massive network of land and sea routes (the Silk Road). This initiative will create a major engine of economic growth for more than 60 countries, which currently account for just 30% of global GDP yet impact nearly two-thirds of the world’s population.
Developing the BRI will require billions of dollars of investment to construct rails, bridges, roads and other infrastructure, which in turn can create huge economic spin-offs once completed.
President Xi, speaking at the two-day Belt and Road Forum in China in May 2017, pledged more than US$100bn for the plan and encouraged banks as well as multilateral institutions to provide the additional funding that this initiative will need.
Key factors to consider in bidding and ﬁnancing of BRI projects
Given that many of the projects are located in developing countries with limited infrastructure or with nascent regulatory frameworks, corporates need to evaluate risks carefully. As the World Economic Forum (WEF) noted, foreign companies may ﬁnd some project risks accentuated in BRI projects, particularly from a geopolitical, funding or operational perspective.
Political risk is a real concern in markets where governance structures are relatively new and changes in political leadership can happen quickly. Geopolitical risk, the WEF said, can take on an additional scope in BRI projects that span across many territories, due to the exposure to changes in political regimes and bilateral relations.
While China and institutions such as the Asian Infrastructure Investment Bank (AIIB) or Asian Development Bank (ADB) may provide ﬁnancing, companies should be aware of other sources for the additional funds they may need. It is easy for companies to pay more for ﬁnancing in developing markets, where there are a limited number of banks that can provide the level of funding needed or where processes may not be fully transparent. Therefore, working with a bank that can provide deep market insights and has partners that are able to provide the funding needed is essential.
Corporates also need to determine how to mitigate risks in countries where the returns are subject to uncertainty in repayment abilities and foreign exchange volatilities. Operational risk is another factor to consider, the WEF said, as gaps in the experience of stakeholders and the increased complexity of BRI transnational projects can result in delays or costs overruns.
Guarantees and infrastructure ﬁnancing needs
Over the years, China has embarked on a number of high-proﬁle projects in countries around the world. Projects ranging from power plants in Pakistan and the Colombo port project in Sri Lanka, to railways in Kazakhstan, as well as a multitude of other initiatives to develop new infrastructure, are reshaping the landscape in many regions.
Investments in projects such as these will inevitably lead to companies needing more ﬁnancing and guarantees throughout the project life cycle. Projects will also involve coordination between parties including contractors, sub-contractors, local businesses, raw material suppliers and the ﬁnancing partner.
Corporates can choose from a range of options and should determine whether it is most beneﬁcial to arrange ﬁnancing through capital markets, syndicated ﬁnance, export credit agency (ECA) loans, or bilateral facilities. They should leverage trade advisory services as they decide how to structure guarantee terms to mitigate risk and manage the overall project risks holistically. They can also use various additional types of ﬁnancing to strengthen their ﬁnancial capabilities, including payment bonds to assure suppliers that they will make payments and retention monies bonds that can release trapped cash or provide working capital.
Choosing a partner for success
Given the large amount of ﬁnancing needed for projects that can last as long as 30 years, combined with the complexity of the projects and the potential risks, companies will need to select and work with a partner that can support them well across multiple countries.
Corporates will also beneﬁt tremendously from investing in a full scope of project planning, which includes detailed costing of the ﬁnancial services required to support the projects and the requirements for achieving their target proﬁtability outcomes.
Beyond obtaining ﬁnancing from ﬁnancial institutions, companies can leverage banks’ advisory and project management expertise as well as their strategic insights on structuring trade instruments in order to manage contractual obligations effectively.
Since BRI projects are mostly large-scale and span across multiple countries, connectivity becomes more crucial than ever. While a well-positioned bank can coordinate ﬁnancing and provide in-depth advice, there are also instances where one bank may not be able to provide complete ﬁnancing alone, no matter how big they may be. The scale of these projects thus makes connectivity to other Asian banks essential.
Asian banks such as DBS provide ﬁnancial and advisory services for companies operating in key developing markets of South and Southeast Asia, such as Bangladesh, India and Sri Lanka as well as Indonesia, Myanmar, the Philippines and Vietnam. Some of these banks also have an extensive correspondent banking network that enables them to provide bank guarantees or project ﬁnancing in other markets and to develop syndicates with other ﬁnancial institutions to provide the project ﬁnancing required.
“Due to the complexity of cross-border collaboration involved in the BRI,” DBS Group Head of Trade Product Management, Stephen Lee explains, “companies can beneﬁt from guidance around regulations and ﬁnancial solutions that can help them maximise returns while minimising risks. Banks can also add value by providing funding or by tapping into multilateral institutions such as the ADB and World Bank for additional ﬁnancing support.”
Corporates can also beneﬁt from working with a bank project ﬁnance team that has deep expertise and that regularly works with clients to support their needs in areas including hedging currency risk, long-term project management and cash management for domestic or other currencies.
Making the right choice
Any company looking at doing business on BRI projects can clearly beneﬁt from working with an Asian bank that has the expertise to provide the full scope of support and advisory needed and the connectivity to provide the ﬁnancing required.
DBS, a leading bank in Asia, has a long track record in providing ﬁnancial services in areas that are essential for BRI projects, such as project ﬁnance, working capital ﬁnance, guarantee undertakings, risk management services, and assisting corporates in obtaining funds through alternative channels.
Complemented by its strong credit ratings (AA- and Aa1), DBS also has the capabilities to provide risk management solutions and advisory services that can assist companies with mitigating foreign exchange or other related risks for the BRI projects.